In This Article:
Today we'll look at Beijing Gas Blue Sky Holdings Limited (HKG:6828) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. 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 measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. 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.'
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 Beijing Gas Blue Sky Holdings:
0.0046 = HK$31m ÷ (HK$8.8b - HK$2.1b) (Based on the trailing twelve months to June 2019.)
So, Beijing Gas Blue Sky Holdings has an ROCE of 0.5%.
See our latest analysis for Beijing Gas Blue Sky Holdings
Does Beijing Gas Blue Sky Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In this analysis, Beijing Gas Blue Sky Holdings's ROCE appears meaningfully below the 9.3% average reported by the Gas Utilities industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Beijing Gas Blue Sky Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. Readers may wish to look for more rewarding investments.
Beijing Gas Blue Sky Holdings reported an ROCE of 0.5% -- better than 3 years ago, when the company didn't make a profit. That implies the business has been improving. The image below shows how Beijing Gas Blue Sky Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. How cyclical is Beijing Gas Blue Sky Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.