Today we are going to look at Want Want China Holdings Limited (HKG:151) to see whether it might be an attractive investment prospect. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed 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’.
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 Want Want China Holdings:
0.21 = CN¥4.8b ÷ (CN¥29b – CN¥6.3b) (Based on the trailing twelve months to September 2019.)
Therefore, Want Want China Holdings has an ROCE of 21%.
Does Want Want China Holdings Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Want Want China Holdings’s ROCE is meaningfully higher than the 10% average in the Food industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, Want Want China Holdings’s ROCE currently appears to be excellent.
You can see in the image below how Want Want China Holdings’s ROCE compares to its industry. Click to see more on past growth.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Want Want China Holdings’s ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Want Want China Holdings has current liabilities of CN¥6.3b and total assets of CN¥29b. As a result, its current liabilities are equal to approximately 21% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.
What We Can Learn From Want Want China Holdings’s ROCE
With low current liabilities and a high ROCE, Want Want China Holdings could be worthy of further investigation. Want Want China Holdings 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.
Want Want China Holdings is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.
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