Today we'll look at Shanghai Jin Jiang Capital Company Limited (HKG:2006) 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. 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 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. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 Shanghai Jin Jiang Capital:
0.036 = CN¥1.7b ÷ (CN¥65b - CN¥18b) (Based on the trailing twelve months to June 2019.)
So, Shanghai Jin Jiang Capital has an ROCE of 3.6%.
Check out our latest analysis for Shanghai Jin Jiang Capital
Is Shanghai Jin Jiang Capital's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Shanghai Jin Jiang Capital's ROCE appears to be significantly below the 5.1% average in the Hospitality industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how Shanghai Jin Jiang Capital stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
We can see that, Shanghai Jin Jiang Capital currently has an ROCE of 3.6% compared to its ROCE 3 years ago, which was 2.3%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Shanghai Jin Jiang Capital's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the 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 Shanghai Jin Jiang Capital.