In This Article:
Today we'll evaluate China Ocean Fishing Holdings Limited (HKG:8047) 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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'.
So, How Do We Calculate ROCE?
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 China Ocean Fishing Holdings:
0.0011 = HK$1.6m ÷ (HK$1.7b - HK$338m) (Based on the trailing twelve months to June 2019.)
So, China Ocean Fishing Holdings has an ROCE of 0.1%.
Check out our latest analysis for China Ocean Fishing Holdings
Does China Ocean Fishing Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see China Ocean Fishing Holdings's ROCE is meaningfully below the Logistics industry average of 6.8%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how China Ocean Fishing Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. It is likely that there are more attractive prospects out there.
China Ocean Fishing Holdings delivered an ROCE of 0.1%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. You can see in the image below how China Ocean Fishing Holdings'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 only a point-in-time measure. You can check if China Ocean Fishing Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.