Today we’ll look at Fosun Tourism Group (HKG:1992) and reflect on its potential as an investment. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First, we’ll go over how we 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.
What is 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. 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 Fosun Tourism Group:
0.14 = CN¥3.0b ÷ (CN¥35b – CN¥14b) (Based on the trailing twelve months to June 2019.)
Therefore, Fosun Tourism Group has an ROCE of 14%.
Is Fosun Tourism Group’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Fosun Tourism Group’s ROCE is meaningfully higher than the 5.4% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Fosun Tourism Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Fosun Tourism Group reported an ROCE of 14% — better than 3 years ago, when the company didn’t make a profit. That suggests the business has returned to profitability. The image below shows how Fosun Tourism Group’s ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Fosun Tourism Group’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Fosun Tourism Group has total assets of CN¥35b and current liabilities of CN¥14b. As a result, its current liabilities are equal to approximately 39% of its total assets. Fosun Tourism Group has a middling amount of current liabilities, increasing its ROCE somewhat.
Our Take On Fosun Tourism Group’s ROCE
Fosun Tourism Group’s ROCE does look good, but the level of current liabilities also contribute to that. Fosun Tourism 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.
I will like Fosun Tourism 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.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.