Does China Fire Safety Enterprise Group Limited (HKG:445)’s Capital Return Make The Cut?

This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in China Fire Safety Enterprise Group Limited (SEHK:445).

Buying China Fire Safety Enterprise Group makes you a partial owner of the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. Therefore, looking at how efficiently China Fire Safety Enterprise Group is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

View our latest analysis for China Fire Safety Enterprise Group

ROCE: Explanation and Calculation

Choosing to invest in China Fire Safety Enterprise Group comes at the cost of investing in another potentially favourable company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your investment at a level that grants an investment over other companies. We can look at China Fire Safety Enterprise Group’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. I have calculated China Fire Safety Enterprise Group’s ROCE for you below:

ROCE Calculation for 445

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = CN¥56.57M ÷ (CN¥1.35B – CN¥240.92M) = 5.09%

445’s 5.09% ROCE means that for every HK$100 you invest, the company creates HK$5.1. A good ROCE hurdle you should aim for in your investments is 15%, which 445 has failed to reach, meaning the company creates an unimpressive amount of earnings from capital employed.

SEHK:445 Last Perf Mar 29th 18
SEHK:445 Last Perf Mar 29th 18

Why is this the case?

Although China Fire Safety Enterprise Group is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Three years ago, 445’s ROCE was 0.11%, which means the company’s capital returns have improved. We can see that earnings have increased from CN¥11.24M to CN¥56.57M whilst capital employed has also increased but to a smaller extent, which means the company has been able to improve ROCE by driving up earnings relative to the capital invested in the business.

Next Steps

Despite China Fire Safety Enterprise Group’s current ROCE remains at an attractive level, the company has triggered an upward trend over the recent past which could be a signal of an improving company. Because return on capital employed is a static metric, you should be looking at it in conjunction with other fundamental indicators like the management team and valuation to determine if an opportunity exists that isn’t made apparent by looking at past data. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate 445 or move on to other alternatives.

  • 1. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for China Fire Safety Enterprise Group’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  • 2. Valuation: What is 445 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 445 is currently mispriced by the market.
  • 3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.