In This Article:
Today we are going to look at Pujiang International Group Limited (HKG:2060) to see whether it might be an attractive investment prospect. 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. 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?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Pujiang International Group:
0.16 = CN¥281m ÷ (CN¥3.4b - CN¥1.6b) (Based on the trailing twelve months to June 2019.)
Therefore, Pujiang International Group has an ROCE of 16%.
See our latest analysis for Pujiang International Group
Is Pujiang International Group's ROCE Good?
One way to assess ROCE is to compare similar companies. Pujiang International Group's ROCE appears to be substantially greater than the 11% average in the Machinery industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Pujiang International Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Our data shows that Pujiang International Group currently has an ROCE of 16%, compared to its ROCE of 12% 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 Pujiang International Group's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Pujiang International Group.