Today we are going to look at Xinghua Port Holdings Ltd. (HKG:1990) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
What is 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. All else being equal, a better business will have a higher ROCE. 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 Xinghua Port Holdings:
0.082 = CN¥119m ÷ (CN¥1.6b - CN¥162m) (Based on the trailing twelve months to June 2019.)
So, Xinghua Port Holdings has an ROCE of 8.2%.
Check out our latest analysis for Xinghua Port Holdings
Is Xinghua Port Holdings's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Xinghua Port Holdings's ROCE is around the 7.6% average reported by the Infrastructure industry. Separate from how Xinghua Port Holdings stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
Xinghua Port Holdings's current ROCE of 8.2% is lower than its ROCE in the past, which was 18%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Xinghua Port Holdings's past growth compares to other companies.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Xinghua Port Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.