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Today we'll evaluate CIMC Enric Holdings Limited (HKG:3899) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding 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. 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?
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 CIMC Enric Holdings:
0.14 = CN¥1.1b ÷ (CN¥16b - CN¥8.1b) (Based on the trailing twelve months to December 2018.)
Therefore, CIMC Enric Holdings has an ROCE of 14%.
See our latest analysis for CIMC Enric Holdings
Is CIMC Enric Holdings's ROCE Good?
One way to assess ROCE is to compare similar companies. CIMC Enric Holdings's ROCE appears to be substantially greater than the 10% average in the Machinery industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where CIMC Enric Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
In our analysis, CIMC Enric Holdings's ROCE appears to be 14%, compared to 3 years ago, when its ROCE was 8.5%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how CIMC Enric Holdings's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.