Today we are going to look at Zhejiang New Century Hotel Management Co., Ltd. (HKG:1158) to see whether it might be an attractive investment prospect. 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. 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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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?
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 Zhejiang New Century Hotel Management:
0.076 = CN¥265m ÷ (CN¥4.5b - CN¥978m) (Based on the trailing twelve months to June 2019.)
Therefore, Zhejiang New Century Hotel Management has an ROCE of 7.6%.
See our latest analysis for Zhejiang New Century Hotel Management
Does Zhejiang New Century Hotel Management Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Zhejiang New Century Hotel Management's ROCE is meaningfully higher than the 5.1% average in the Hospitality industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from how Zhejiang New Century Hotel Management stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
We can see that, Zhejiang New Century Hotel Management currently has an ROCE of 7.6%, less than the 16% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how Zhejiang New Century Hotel Management's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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.