Does Pingtan Marine Enterprise Ltd.’s (NASDAQ:PME) ROCE Reflect Well On The Business?

Today we’ll look at Pingtan Marine Enterprise Ltd. (NASDAQ:PME) and reflect on its potential as an investment. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. 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 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 Pingtan Marine Enterprise:

0.073 = US$18m ÷ (US$333m – US$88m) (Based on the trailing twelve months to March 2019.)

So, Pingtan Marine Enterprise has an ROCE of 7.3%.

Check out our latest analysis for Pingtan Marine Enterprise

Is Pingtan Marine Enterprise’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. We can see Pingtan Marine Enterprise’s ROCE is around the 8.1% average reported by the Food industry. Setting aside the industry comparison for now, Pingtan Marine Enterprise’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.

Pingtan Marine Enterprise has an ROCE of 7.3%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving.

NasdaqCM:PME Past Revenue and Net Income, July 25th 2019
NasdaqCM:PME Past Revenue and Net Income, July 25th 2019

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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Pingtan Marine Enterprise.

What Are Current Liabilities, And How Do They Affect Pingtan Marine Enterprise’s 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.

Pingtan Marine Enterprise has total liabilities of US$88m and total assets of US$333m. Therefore its current liabilities are equivalent to approximately 26% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

What We Can Learn From Pingtan Marine Enterprise’s ROCE

With that in mind, we’re not overly impressed with Pingtan Marine Enterprise’s ROCE, so it may not be the most appealing prospect. You might be able to find a better investment than Pingtan Marine Enterprise. 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 Pingtan Marine Enterprise 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.