In This Article:
Today we'll look at China High Speed Transmission Equipment Group Co., Ltd. (HKG:658) 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.
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. In general, businesses with a higher ROCE are usually better quality. 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'.
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 High Speed Transmission Equipment Group:
0.038 = CN¥490m ÷ (CN¥26b - CN¥13b) (Based on the trailing twelve months to June 2019.)
Therefore, China High Speed Transmission Equipment Group has an ROCE of 3.8%.
Check out our latest analysis for China High Speed Transmission Equipment Group
Does China High Speed Transmission Equipment Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, China High Speed Transmission Equipment Group's ROCE appears to be significantly below the 8.1% average in the Electrical industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how China High Speed Transmission Equipment Group 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 High Speed Transmission Equipment Group's current ROCE of 3.8% is lower than 3 years ago, when the company reported a 15% ROCE. This makes us wonder if the business is facing new challenges. The image below shows how China High Speed Transmission Equipment Group's ROCE compares to its industry, and you can click it to see more detail on its 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, 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.