China Parenting Network Holdings Limited’s (HKG:1736) Investment Returns Are Lagging Its Industry

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Today we are going to look at China Parenting Network Holdings Limited (HKG:1736) 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 of all, we’ll work out how to 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.

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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’

How Do You Calculate Return On Capital Employed?

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 Parenting Network Holdings:

0.064 = CN¥27m ÷ (CN¥457m – CN¥33m) (Based on the trailing twelve months to December 2018.)

Therefore, China Parenting Network Holdings has an ROCE of 6.4%.

See our latest analysis for China Parenting Network Holdings

Is China Parenting Network Holdings’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, China Parenting Network Holdings’s ROCE appears to be significantly below the 15% average in the Interactive Media and Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, China Parenting Network Holdings’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 Parenting Network Holdings’s current ROCE of 6.4% is lower than its ROCE in the past, which was 10%, 3 years ago. This makes us wonder if the business is facing new challenges.

SEHK:1736 Past Revenue and Net Income, June 12th 2019
SEHK:1736 Past Revenue and Net Income, June 12th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is China Parenting Network Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

China Parenting Network Holdings’s Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

China Parenting Network Holdings has total liabilities of CN¥33m and total assets of CN¥457m. As a result, its current liabilities are equal to approximately 7.2% of its total assets. China Parenting Network Holdings reports few current liabilities, which have a negligible impact on its unremarkable ROCE.

What We Can Learn From China Parenting Network Holdings’s ROCE

Based on this information, China Parenting Network Holdings appears to be a mediocre business. 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.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.