Today we are going to look at Pingtan Marine Enterprise Ltd. (NASDAQ:PME) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. Overall, it is a valuable metric that has its flaws. 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 Pingtan Marine Enterprise:
0.082 = US$21m ÷ (US$362m - US$104m) (Based on the trailing twelve months to June 2019.)
So, Pingtan Marine Enterprise has an ROCE of 8.2%.
Check out our latest analysis for Pingtan Marine Enterprise
Does Pingtan Marine Enterprise Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. It appears that Pingtan Marine Enterprise's ROCE is fairly close to the Food industry average of 8.2%. Separate from how Pingtan Marine Enterprise stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
Pingtan Marine Enterprise delivered an ROCE of 8.2%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. You can see in the image below how Pingtan Marine Enterprise'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. 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 only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Pingtan Marine Enterprise.