In This Article:
Today we are going to look at Xinyi Glass Holdings Limited (HKG:868) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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?
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 Xinyi Glass Holdings:
0.16 = HK$4.6b ÷ (HK$36b - HK$8.4b) (Based on the trailing twelve months to December 2019.)
Therefore, Xinyi Glass Holdings has an ROCE of 16%.
View our latest analysis for Xinyi Glass Holdings
Is Xinyi Glass Holdings's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Xinyi Glass Holdings's ROCE is meaningfully higher than the 12% average in the Auto Components industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Xinyi Glass Holdings's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
The image below shows how Xinyi Glass Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Xinyi Glass Holdings.
What Are Current Liabilities, And How Do They Affect Xinyi Glass Holdings's ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.