Today we'll look at BYD Electronic (International) Company Limited (HKG:285) 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.

First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. Ultimately, it is a useful but imperfect metric. 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 BYD Electronic (International):

0.065 = CN¥1.1b ÷ (CN¥26b - CN¥9.3b) (Based on the trailing twelve months to June 2019.)

So, BYD Electronic (International) has an ROCE of 6.5%.

Check out our latest analysis for BYD Electronic (International)

Does BYD Electronic (International) Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, BYD Electronic (International)'s ROCE appears to be around the 7.1% average of the Communications industry. Aside from the industry comparison, BYD Electronic (International)'s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

The image below shows how BYD Electronic (International)'s ROCE compares to its industry, and you can click it to see more detail on its 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, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for BYD Electronic (International).