Today we are going to look at Grand Baoxin Auto Group Limited (HKG:1293) 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. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

How Do You Calculate Return On Capital Employed?

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 Grand Baoxin Auto Group:

0.12 = CN¥1.7b ÷ (CN¥28b - CN¥14b) (Based on the trailing twelve months to December 2018.)

So, Grand Baoxin Auto Group has an ROCE of 12%.

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Check out our latest analysis for Grand Baoxin Auto Group

Is Grand Baoxin Auto Group's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. It appears that Grand Baoxin Auto Group's ROCE is fairly close to the Specialty Retail industry average of 13%. Regardless of where Grand Baoxin Auto Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Grand Baoxin Auto Group.

Do Grand Baoxin Auto Group's Current Liabilities Skew Its ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.