In This Article:
Today we'll evaluate Tongcheng-Elong Holdings Limited (HKG:780) 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. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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 Tongcheng-Elong Holdings:
0.06 = CN¥815m ÷ (CN¥19b - CN¥5.7b) (Based on the trailing twelve months to September 2019.)
Therefore, Tongcheng-Elong Holdings has an ROCE of 6.0%.
View our latest analysis for Tongcheng-Elong Holdings
Does Tongcheng-Elong Holdings Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Tongcheng-Elong Holdings's ROCE appears meaningfully below the 8.9% average reported by the Online Retail industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Setting aside the industry comparison for now, Tongcheng-Elong 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.
Tongcheng-Elong Holdings delivered an ROCE of 6.0%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. The image below shows how Tongcheng-Elong Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Tongcheng-Elong Holdings.