How Do CIMC-TianDa Holdings Company Limited’s (HKG:445) Returns Compare To Its Industry?

Today we are going to look at CIMC-TianDa Holdings Company Limited (HKG:445) to see whether it might be an attractive investment prospect. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.

What is 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. In brief, it is a useful tool, but it is not without drawbacks. 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’.

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 CIMC-TianDa Holdings:

0.064 = CN¥205m ÷ (CN¥5.9b – CN¥2.7b) (Based on the trailing twelve months to December 2018.)

Therefore, CIMC-TianDa Holdings has an ROCE of 6.4%.

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Check out our latest analysis for CIMC-TianDa Holdings

Does CIMC-TianDa Holdings Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, CIMC-TianDa Holdings’s ROCE appears to be significantly below the 10% average in the Machinery industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how CIMC-TianDa Holdings stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.

SEHK:445 Past Revenue and Net Income, May 21st 2019
SEHK:445 Past Revenue and Net Income, May 21st 2019

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, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for CIMC-TianDa Holdings.

How CIMC-TianDa Holdings’s Current Liabilities Impact Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

CIMC-TianDa Holdings has total assets of CN¥5.9b and current liabilities of CN¥2.7b. Therefore its current liabilities are equivalent to approximately 46% of its total assets. CIMC-TianDa Holdings has a medium level of current liabilities, which would boost its ROCE somewhat.

What We Can Learn From CIMC-TianDa Holdings’s ROCE

Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. You might be able to find a better investment than CIMC-TianDa Holdings. 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).

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.