In This Article:
Today we are going to look at Sany Heavy Equipment International Holdings Company Limited (HKG:631) 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. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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?
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 Sany Heavy Equipment International Holdings:
0.07 = CN¥634m ÷ (CN¥16b - CN¥6.4b) (Based on the trailing twelve months to December 2019.)
Therefore, Sany Heavy Equipment International Holdings has an ROCE of 7.0%.
See our latest analysis for Sany Heavy Equipment International Holdings
Is Sany Heavy Equipment International Holdings's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Sany Heavy Equipment International Holdings's ROCE appears to be around the 8.2% average of the Machinery industry. Setting aside the industry comparison for now, Sany Heavy Equipment International Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
Sany Heavy Equipment International Holdings has an ROCE of 7.0%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving. You can see in the image below how Sany Heavy Equipment International Holdings's ROCE compares to its industry. Click to see more on past growth.
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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.