In This Article:
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Today we’ll look at Yue Da International Holdings Limited (HKG:629) and reflect on its potential as an investment. 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. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
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. In brief, it is a useful tool, but it is not without drawbacks. 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 Yue Da International Holdings:
0.0048 = -CN¥127.7m ÷ (CN¥1.3b – CN¥557m) (Based on the trailing twelve months to June 2018.)
So, Yue Da International Holdings has an ROCE of 0.5%.
View our latest analysis for Yue Da International Holdings
Does Yue Da International Holdings Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Yue Da International Holdings’s ROCE appears to be significantly below the 11% average in the Metals and Mining industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Yue Da International Holdings’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
Yue Da International Holdings reported an ROCE of 0.5% — better than 3 years ago, when the company didn’t make a profit. This makes us wonder if the company is improving.
When considering this metric, keep in mind that it is backwards looking, and 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. Given the industry it operates in, Yue Da International Holdings could be considered cyclical. You can check if Yue Da International Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.