In This Article:
Today we'll evaluate Ocean Line Port Development Limited (HKG:8502) to determine whether it could have potential as an investment idea. 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.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is 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. 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'.
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 Ocean Line Port Development:
0.15 = CN¥64m ÷ (CN¥535m - CN¥104m) (Based on the trailing twelve months to June 2019.)
Therefore, Ocean Line Port Development has an ROCE of 15%.
View our latest analysis for Ocean Line Port Development
Is Ocean Line Port Development's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Ocean Line Port Development's ROCE is meaningfully better than the 7.4% average in the Infrastructure industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Ocean Line Port Development compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Our data shows that Ocean Line Port Development currently has an ROCE of 15%, compared to its ROCE of 2.3% 3 years ago. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Ocean Line Port Development'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. 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 Ocean Line Port Development is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.