Today we'll look at China Ocean Fishing Holdings Limited (HKG:8047) 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 of all, we'll work out how to 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.

Return On Capital Employed (ROCE): What is it?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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?

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 China Ocean Fishing Holdings:

0.00082 = HK$1.1m ÷ (HK$1.6b - HK$339m) (Based on the trailing twelve months to December 2019.)

So, China Ocean Fishing Holdings has an ROCE of 0.08%.

Check out our latest analysis for China Ocean Fishing Holdings

Does China Ocean Fishing Holdings Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see China Ocean Fishing Holdings's ROCE is meaningfully below the Logistics industry average of 7.3%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside China Ocean Fishing Holdings's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.

China Ocean Fishing Holdings delivered an ROCE of 0.08%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how China Ocean Fishing Holdings's past growth compares to other companies.

When considering this metric, keep in mind that it is backwards looking, and 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. You can check if China Ocean Fishing Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Do China Ocean Fishing Holdings's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

China Ocean Fishing Holdings has total assets of HK$1.6b and current liabilities of HK$339m. Therefore its current liabilities are equivalent to approximately 21% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

The Bottom Line On China Ocean Fishing Holdings's ROCE

That's not a bad thing, however China Ocean Fishing Holdings has a weak ROCE and may not be an attractive investment. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.