In This Article:
Today we'll look at Uni-President China Holdings Ltd (HKG:220) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
What is 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. 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 Uni-President China Holdings:
0.13 = CN¥1.8b ÷ (CN¥22b - CN¥7.6b) (Based on the trailing twelve months to December 2019.)
Therefore, Uni-President China Holdings has an ROCE of 13%.
See our latest analysis for Uni-President China Holdings
Is Uni-President China Holdings's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Uni-President China Holdings's ROCE is meaningfully better than the 10% average in the Food industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Uni-President China Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that, Uni-President China Holdings currently has an ROCE of 13% compared to its ROCE 3 years ago, which was 5.1%. This makes us wonder if the company is improving. The image below shows how Uni-President China Holdings's ROCE compares to its industry, and you can click it to see more detail on its 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Uni-President China Holdings.