In This Article:
Today we'll look at Jujiang Construction Group Co., Ltd. (HKG:1459) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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'.
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 Jujiang Construction Group:
0.19 = CN¥275m ÷ (CN¥5.3b - CN¥3.8b) (Based on the trailing twelve months to June 2019.)
So, Jujiang Construction Group has an ROCE of 19%.
See our latest analysis for Jujiang Construction Group
Does Jujiang Construction Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Jujiang Construction Group's ROCE is meaningfully higher than the 12% average in the Construction industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Jujiang Construction Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
The image below shows how Jujiang Construction Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. If Jujiang Construction Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Jujiang Construction Group's Current Liabilities Impact 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 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 counter this, investors can check if a company has high current liabilities relative to total assets.