In This Article:
Today we are going to look at Shenzhou International Group Holdings Limited (HKG:2313) 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. And finally, we’ll look at how its current liabilities are impacting 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. 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.’
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 Shenzhou International Group Holdings:
0.20 = CN¥3.9b ÷ (CN¥25b – CN¥4.2b) (Based on the trailing twelve months to June 2018.)
Therefore, Shenzhou International Group Holdings has an ROCE of 20%.
View our latest analysis for Shenzhou International Group Holdings
Does Shenzhou International Group Holdings Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Shenzhou International Group Holdings’s ROCE is meaningfully better than the 9.5% average in the Luxury industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Shenzhou International Group Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.