Here’s why COSCO SHIPPING Ports Limited’s (HKG:1199) Returns On Capital Matters So Much

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Today we are going to look at COSCO SHIPPING Ports Limited (HKG:1199) to see whether it might be an attractive investment prospect. 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. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.

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

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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 COSCO SHIPPING Ports:

0.024 = US$214m ÷ (US$9.8b – US$774m) (Based on the trailing twelve months to March 2019.)

So, COSCO SHIPPING Ports has an ROCE of 2.4%.

Check out our latest analysis for COSCO SHIPPING Ports

Does COSCO SHIPPING Ports Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, COSCO SHIPPING Ports’s ROCE appears to be significantly below the 7.8% average in the Infrastructure industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how COSCO SHIPPING Ports compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. It is likely that there are more attractive prospects out there.

COSCO SHIPPING Ports’s current ROCE of 2.4% is lower than 3 years ago, when the company reported a 3.7% ROCE. This makes us wonder if the business is facing new challenges.

SEHK:1199 Past Revenue and Net Income, April 30th 2019
SEHK:1199 Past Revenue and Net Income, April 30th 2019

It is important to remember that ROCE shows past performance, and is 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for COSCO SHIPPING Ports.

Do COSCO SHIPPING Ports’s Current Liabilities Skew Its ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

COSCO SHIPPING Ports has total assets of US$9.8b and current liabilities of US$774m. As a result, its current liabilities are equal to approximately 7.9% of its total assets. With barely any current liabilities, there is minimal impact on COSCO SHIPPING Ports’s admittedly low ROCE.

What We Can Learn From COSCO SHIPPING Ports’s ROCE

Nevertheless, there are potentially more attractive companies to invest in. You might be able to find a better investment than COSCO SHIPPING Ports. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like COSCO SHIPPING Ports better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.