In This Article:
Today we are going to look at Huazhong In-Vehicle Holdings Company Limited (HKG:6830) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
So, How Do We Calculate ROCE?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Huazhong In-Vehicle Holdings:
0.10 = CN¥131m ÷ (CN¥3.3b - CN¥2.0b) (Based on the trailing twelve months to June 2019.)
So, Huazhong In-Vehicle Holdings has an ROCE of 10%.
See our latest analysis for Huazhong In-Vehicle Holdings
Is Huazhong In-Vehicle Holdings's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Huazhong In-Vehicle Holdings's ROCE is around the 11% average reported by the Auto Components industry. Independently of how Huazhong In-Vehicle Holdings compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
We can see that, Huazhong In-Vehicle Holdings currently has an ROCE of 10%, less than the 17% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Huazhong In-Vehicle Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. You can check if Huazhong In-Vehicle Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.