In This Article:
Today we'll look at Tian Chang Group Holdings Ltd. (HKG:2182) 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.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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.
How Do You Calculate Return On Capital Employed?
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 Tian Chang Group Holdings:
0.34 = HK$190m ÷ (HK$905m - HK$351m) (Based on the trailing twelve months to June 2019.)
Therefore, Tian Chang Group Holdings has an ROCE of 34%.
View our latest analysis for Tian Chang Group Holdings
Does Tian Chang Group Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, Tian Chang Group Holdings's ROCE is meaningfully higher than the 11% average in the Chemicals industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Tian Chang Group Holdings's ROCE in absolute terms currently looks quite high.
Our data shows that Tian Chang Group Holdings currently has an ROCE of 34%, compared to its ROCE of 11% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Tian Chang Group Holdings's ROCE compares to its industry, and you can click it to see more detail on its 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, after all, simply a snap shot of a single year. If Tian Chang Group Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.