What We Think Of China Boqi Environmental (Holding) Co., Ltd.’s (HKG:2377) Investment Potential

Today we’ll look at China Boqi Environmental (Holding) Co., Ltd. (HKG:2377) 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. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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?

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 Boqi Environmental (Holding):

0.083 = CN¥183m ÷ (CN¥3.5b – CN¥1.3b) (Based on the trailing twelve months to December 2018.)

Therefore, China Boqi Environmental (Holding) has an ROCE of 8.3%.

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Does China Boqi Environmental (Holding) Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, China Boqi Environmental (Holding)’s ROCE appears to be around the 10% average of the Commercial Services industry. Setting aside the industry comparison for now, China Boqi Environmental (Holding)’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

China Boqi Environmental (Holding)’s current ROCE of 8.3% is lower than 3 years ago, when the company reported a 15% ROCE. So investors might consider if it has had issues recently.

SEHK:2377 Past Revenue and Net Income, May 24th 2019
SEHK:2377 Past Revenue and Net Income, May 24th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. 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 China Boqi Environmental (Holding).

What Are Current Liabilities, And How Do They Affect China Boqi Environmental (Holding)’s 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.

China Boqi Environmental (Holding) has total liabilities of CN¥1.3b and total assets of CN¥3.5b. Therefore its current liabilities are equivalent to approximately 38% of its total assets. China Boqi Environmental (Holding)’s ROCE is improved somewhat by its moderate amount of current liabilities.

Our Take On China Boqi Environmental (Holding)’s ROCE

Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like China Boqi Environmental (Holding) better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.