Should You Like Pingtan Marine Enterprise Ltd.’s (NASDAQ:PME) High Return On Capital Employed?

Today we are going to look at Pingtan Marine Enterprise Ltd. (NASDAQ:PME) 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 of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the amount of pre-tax profits a company can generate from the 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?

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 Pingtan Marine Enterprise:

0.11 = US$19m ÷ (US$247m – US$73m) (Based on the trailing twelve months to December 2018.)

So, Pingtan Marine Enterprise has an ROCE of 11%.

See our latest analysis for Pingtan Marine Enterprise

Is Pingtan Marine Enterprise’s ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, we find that Pingtan Marine Enterprise’s ROCE is meaningfully better than the 9.1% average in the Food industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Pingtan Marine Enterprise sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Pingtan Marine Enterprise delivered an ROCE of 11%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability.

NasdaqCM:PME Past Revenue and Net Income, March 21st 2019
NasdaqCM:PME Past Revenue and Net Income, March 21st 2019

When considering this metric, keep in mind that it is backwards looking, and 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. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How Pingtan Marine Enterprise’s Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Pingtan Marine Enterprise has total liabilities of US$73m and total assets of US$247m. Therefore its current liabilities are equivalent to approximately 30% of its total assets. Low current liabilities are not boosting the ROCE too much.

Our Take On Pingtan Marine Enterprise’s ROCE

Overall, Pingtan Marine Enterprise has a decent ROCE and could be worthy of further research. Of course you might be able to find a better stock than Pingtan Marine Enterprise. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.