Today we’ll evaluate Yuexiu Transport Infrastructure Limited (HKG:1052) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we’ll look at what ROCE is and how we calculate it. 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 ‘return’ (pre-tax profit) a company generates from 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.’
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 Yuexiu Transport Infrastructure:
0.086 = CN¥1.7b ÷ (CN¥23b – CN¥1.4b) (Based on the trailing twelve months to June 2018.)
Therefore, Yuexiu Transport Infrastructure has an ROCE of 8.6%.
Does Yuexiu Transport Infrastructure Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Yuexiu Transport Infrastructure’s ROCE appears to be substantially greater than the 6.9% average in the Infrastructure 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. Setting aside the industry comparison for now, Yuexiu Transport Infrastructure’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.
As we can see, Yuexiu Transport Infrastructure currently has an ROCE of 8.6% compared to its ROCE 3 years ago, which was 5.9%. This makes us think the business might be improving.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Yuexiu Transport Infrastructure.
Do Yuexiu Transport Infrastructure’s Current Liabilities Skew 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Yuexiu Transport Infrastructure has total assets of CN¥23b and current liabilities of CN¥1.4b. Therefore its current liabilities are equivalent to approximately 6.1% of its total assets. Yuexiu Transport Infrastructure has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.
The Bottom Line On Yuexiu Transport Infrastructure’s ROCE
Yuexiu Transport Infrastructure looks like an ok business, but on this analysis it is not at the top of our buy list. Of course you might be able to find a better stock than Yuexiu Transport Infrastructure. So you may wish to see this free collection of other companies that have grown earnings strongly.
Of course Yuexiu Transport Infrastructure may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE 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 firstname.lastname@example.org.