How Do Tiande Chemical Holdings Limited’s (HKG:609) Returns Compare To Its Industry?

Today we are going to look at Tiande Chemical Holdings Limited (HKG:609) 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, 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.

Return On Capital Employed (ROCE): What is it?

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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’

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 Tiande Chemical Holdings:

0.0099 = CN¥163m ÷ (CN¥1.8b – CN¥453m) (Based on the trailing twelve months to June 2018.)

Therefore, Tiande Chemical Holdings has an ROCE of 1.0%.

See our latest analysis for Tiande Chemical Holdings

Is Tiande Chemical Holdings’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Tiande Chemical Holdings’s ROCE appears to be significantly below the 11% average in the Chemicals industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Tiande Chemical Holdings’s performance relative to its industry, its ROCE in absolute terms is poor – not much better than government bonds. It is likely that there are more attractive prospects out there.

Tiande Chemical Holdings’s current ROCE of 1.0% is lower than 3 years ago, when the company reported a 19% ROCE. This makes us wonder if the business is facing new challenges.

SEHK:609 Last Perf December 19th 18
SEHK:609 Last Perf December 19th 18

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. You can check if Tiande Chemical Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How Tiande Chemical Holdings’s Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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) unfairly boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Tiande Chemical Holdings has total assets of CN¥1.8b and current liabilities of CN¥453m. As a result, its current liabilities are equal to approximately 25% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

What We Can Learn From Tiande Chemical Holdings’s ROCE

That’s not a bad thing, however Tiande Chemical Holdings has a weak ROCE and may not be an attractive investment. 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.

If you would prefer check out another company — one with potentially superior financials — then do not miss this free list of interesting companies, that have HIGH return on equity and low debt.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.