In This Article:
Today we'll look at Yuan Heng Gas Holdings Limited (HKG:332) and reflect on its potential as an investment. 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. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from 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 Yuan Heng Gas Holdings:
0.069 = CN¥108m ÷ (CN¥4.2b - CN¥2.7b) (Based on the trailing twelve months to September 2019.)
So, Yuan Heng Gas Holdings has an ROCE of 6.9%.
Check out our latest analysis for Yuan Heng Gas Holdings
Is Yuan Heng Gas Holdings's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Yuan Heng Gas Holdings's ROCE appears to be around the 7.6% average of the Oil and Gas industry. Aside from the industry comparison, Yuan Heng Gas Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Our data shows that Yuan Heng Gas Holdings currently has an ROCE of 6.9%, compared to its ROCE of 0.08% 3 years ago. This makes us think the business might be improving. You can see in the image below how Yuan Heng Gas Holdings's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. We note Yuan Heng Gas Holdings could be considered a cyclical business. If Yuan Heng Gas Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.