Today we’ll look at Shineco, Inc. (NASDAQ:TYHT) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into 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. Finally, we’ll look at how its current liabilities affect 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.’
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 Shineco:
0.12 = US$9.3m ÷ (US$81m – US$8.0m) (Based on the trailing twelve months to September 2018.)
Therefore, Shineco has an ROCE of 12%.
Is Shineco’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Shineco’s ROCE is meaningfully below the Personal Products industry average of 23%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of where Shineco sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
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. If Shineco is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Shineco’s Current Liabilities And Their Impact On 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. 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.
Shineco has total assets of US$81m and current liabilities of US$8.0m. As a result, its current liabilities are equal to approximately 9.8% of its total assets. Low current liabilities have only a minimal impact on Shineco’s ROCE, making its decent returns more credible.
The Bottom Line On Shineco’s ROCE
If Shineco can continue reinvesting in its business, it could be an attractive prospect. Of course you might be able to find a better stock than Shineco. So you may wish to see this free collection of other companies that have grown earnings strongly.
Of course Shineco 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.