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Today we'll look at Binjiang Services Group Co. Ltd. (HKG:3316) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

Return On Capital Employed (ROCE): What is it?

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. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

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 Binjiang Services Group:

0.49 = CN¥91m ÷ (CN¥551m - CN¥366m) (Based on the trailing twelve months to December 2018.)

Therefore, Binjiang Services Group has an ROCE of 49%.

Check out our latest analysis for Binjiang Services Group

Does Binjiang Services Group Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Binjiang Services Group's ROCE is meaningfully better than the 10% average in the Commercial Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Binjiang Services Group's ROCE is currently very good.

You can click on the image below to see (in greater detail) how Binjiang Services Group's past growth compares to other companies.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. If Binjiang Services Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Binjiang Services Group's Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.

Binjiang Services Group has total assets of CN¥551m and current liabilities of CN¥366m. As a result, its current liabilities are equal to approximately 66% of its total assets. While a high level of current liabilities boosts its ROCE, Binjiang Services Group's returns are still very good.

The Bottom Line On Binjiang Services Group's ROCE

So we would be interested in doing more research here -- there may be an opportunity! There might be better investments than Binjiang Services Group out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.

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. Thank you for reading.