Today we’ll look at China Greenland Broad Greenstate Group Company Limited (HKG:1253) 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 of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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?
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 China Greenland Broad Greenstate Group:
0.069 = CN¥84m ÷ (CN¥3.4b – CN¥2.2b) (Based on the trailing twelve months to December 2018.)
So, China Greenland Broad Greenstate Group has an ROCE of 6.9%.
Is China Greenland Broad Greenstate Group’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see China Greenland Broad Greenstate Group’s ROCE is meaningfully below the Commercial Services industry average of 10%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, China Greenland Broad Greenstate Group’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
China Greenland Broad Greenstate Group’s current ROCE of 6.9% is lower than 3 years ago, when the company reported a 33% ROCE. So investors might consider if it has had issues recently.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. You can check if China Greenland Broad Greenstate Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect China Greenland Broad Greenstate Group’s 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.
China Greenland Broad Greenstate Group has total assets of CN¥3.4b and current liabilities of CN¥2.2b. Therefore its current liabilities are equivalent to approximately 64% of its total assets. China Greenland Broad Greenstate Group’s current liabilities are fairly high, making its ROCE look better than otherwise.
What We Can Learn From China Greenland Broad Greenstate Group’s ROCE
Notably, it also has a mediocre ROCE, which to my mind is not an appealing combination. You might be able to find a better investment than China Greenland Broad Greenstate Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
I will like China Greenland Broad Greenstate Group better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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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. Thank you for reading.