Today we'll look at Asiainfo Technologies Limited (HKG:1675) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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?

The formula for calculating the return on capital employed is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Asiainfo Technologies:

0.11 = CN¥405m ÷ (CN¥6.5b - CN¥2.8b) (Based on the trailing twelve months to June 2019.)

Therefore, Asiainfo Technologies has an ROCE of 11%.

View our latest analysis for Asiainfo Technologies

Does Asiainfo Technologies Have A Good ROCE?

One way to assess ROCE is to compare similar companies. It appears that Asiainfo Technologies's ROCE is fairly close to the Software industry average of 9.4%. Regardless of where Asiainfo Technologies sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Our data shows that Asiainfo Technologies currently has an ROCE of 11%, compared to its ROCE of 6.0% 3 years ago. This makes us think the business might be improving. You can see in the image below how Asiainfo Technologies's ROCE compares to its industry. Click to see more on past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Asiainfo Technologies.

Do Asiainfo Technologies's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Asiainfo Technologies has current liabilities of CN¥2.8b and total assets of CN¥6.5b. Therefore its current liabilities are equivalent to approximately 44% of its total assets. Asiainfo Technologies has a medium level of current liabilities, which would boost the ROCE.

The Bottom Line On Asiainfo Technologies's ROCE

Asiainfo Technologies's ROCE does look good, but the level of current liabilities also contribute to that. Asiainfo Technologies shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.