Is COSCO SHIPPING Holdings Co., Ltd.’s (HKG:1919) Return On Capital Employed Any Good?

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Today we’ll evaluate COSCO SHIPPING Holdings Co., Ltd. (HKG:1919) 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, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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’.

So, How Do We Calculate ROCE?

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 COSCO SHIPPING Holdings:

0.027 = CN¥4.4b ÷ (CN¥256b – CN¥90b) (Based on the trailing twelve months to March 2019.)

So, COSCO SHIPPING Holdings has an ROCE of 2.7%.

Check out our latest analysis for COSCO SHIPPING Holdings

Does COSCO SHIPPING Holdings Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that COSCO SHIPPING Holdings’s ROCE is fairly close to the Shipping industry average of 3.1%. Putting aside COSCO SHIPPING Holdings’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.

COSCO SHIPPING Holdings reported an ROCE of 2.7% — better than 3 years ago, when the company didn’t make a profit. That suggests the business has returned to profitability.

SEHK:1919 Past Revenue and Net Income, May 6th 2019
SEHK:1919 Past Revenue and Net Income, May 6th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. 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 COSCO SHIPPING Holdings’s 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 the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

COSCO SHIPPING Holdings has total liabilities of CN¥90b and total assets of CN¥256b. Therefore its current liabilities are equivalent to approximately 35% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, COSCO SHIPPING Holdings’s ROCE is concerning.

The Bottom Line On COSCO SHIPPING Holdings’s ROCE

This company may not be the most attractive investment prospect. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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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.