In This Article:
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today we'll look at ENN Energy Holdings Limited (HKG:2688) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
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.
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. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 ENN Energy Holdings:
0.15 = CN¥6.1b ÷ (CN¥74b - CN¥33b) (Based on the trailing twelve months to December 2018.)
So, ENN Energy Holdings has an ROCE of 15%.
Check out our latest analysis for ENN Energy Holdings
Is ENN Energy Holdings's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. ENN Energy Holdings's ROCE appears to be substantially greater than the 8.5% average in the Gas Utilities industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where ENN Energy Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
You can see in the image below how ENN Energy Holdings's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for ENN Energy Holdings.