Today we'll evaluate Tianjin Tianbao Energy Co., Ltd. (HKG:1671) to determine whether it could have potential as an investment idea. 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. 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 measures the amount of pre-tax profits a company can generate from the capital employed 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. 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 Tianjin Tianbao Energy:

0.049 = CN¥20m ÷ (CN¥540m - CN¥138m) (Based on the trailing twelve months to December 2019.)

Therefore, Tianjin Tianbao Energy has an ROCE of 4.9%.

Check out our latest analysis for Tianjin Tianbao Energy

Does Tianjin Tianbao Energy Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, Tianjin Tianbao Energy's ROCE appears to be around the 4.4% average of the Electric Utilities industry. Separate from how Tianjin Tianbao Energy stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.

We can see that, Tianjin Tianbao Energy currently has an ROCE of 4.9%, less than the 17% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Tianjin Tianbao Energy's ROCE compares to its industry. Click to see more on past growth.

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, after all, simply a snap shot of a single year. If Tianjin Tianbao Energy is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.