Today we are going to look at China Kepei Education Group Limited (HKG:1890) to see whether it might be an attractive investment prospect. 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. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding 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. 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'.
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 China Kepei Education Group:
0.13 = CN¥342m ÷ (CN¥2.9b - CN¥238m) (Based on the trailing twelve months to June 2019.)
Therefore, China Kepei Education Group has an ROCE of 13%.
Does China Kepei Education Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, China Kepei Education Group's ROCE appears to be around the 11% average of the Consumer Services industry. Separate from China Kepei Education Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
China Kepei Education Group's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
China Kepei Education Group has total liabilities of CN¥238m and total assets of CN¥2.9b. As a result, its current liabilities are equal to approximately 8.2% of its total assets. Low current liabilities have only a minimal impact on China Kepei Education Group's ROCE, making its decent returns more credible.
What We Can Learn From China Kepei Education Group's ROCE
If it is able to keep this up, China Kepei Education Group could be attractive. There might be better investments than China Kepei Education Group out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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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.