Today we’ll evaluate Ruifeng Power Group Company Limited (HKG:2025) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the 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?
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 Ruifeng Power Group:
0.10 = CN¥99m ÷ (CN¥1.4b – CN¥422m) (Based on the trailing twelve months to June 2019.)
So, Ruifeng Power Group has an ROCE of 10.0%.
Does Ruifeng Power Group Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Ruifeng Power Group’s ROCE is fairly close to the Auto Components industry average of 12%. Separate from Ruifeng Power Group’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Ruifeng Power Group’s current ROCE of 10.0% is lower than 3 years ago, when the company reported a 19% ROCE. This makes us wonder if the business is facing new challenges. You can see in the image below how Ruifeng Power Group’s ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 Ruifeng Power Group? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Ruifeng Power Group’s Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Ruifeng Power Group has total liabilities of CN¥422m and total assets of CN¥1.4b. Therefore its current liabilities are equivalent to approximately 30% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
Our Take On Ruifeng Power Group’s ROCE
Overall, Ruifeng Power Group has a decent ROCE and could be worthy of further research. Ruifeng Power Group shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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