Today we are going to look at SINOPEC Engineering (Group) Co., Ltd. (HKG:2386) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

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

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'.

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 SINOPEC Engineering (Group):

0.041 = CN¥1.2b ÷ (CN¥71b - CN¥41b) (Based on the trailing twelve months to June 2019.)

Therefore, SINOPEC Engineering (Group) has an ROCE of 4.1%.

View our latest analysis for SINOPEC Engineering (Group)

Does SINOPEC Engineering (Group) Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. We can see SINOPEC Engineering (Group)'s ROCE is meaningfully below the Construction industry average of 12%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how SINOPEC Engineering (Group) stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.

SINOPEC Engineering (Group)'s current ROCE of 4.1% is lower than 3 years ago, when the company reported a 9.4% ROCE. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how SINOPEC Engineering (Group)'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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for SINOPEC Engineering (Group).