Today we are going to look at Fangdd Network Group Ltd. (NASDAQ:DUO) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we’ll work out how to calculate ROCE. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. 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?
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 Fangdd Network Group:
0.17 = CN¥178m ÷ (CN¥3.6b – CN¥2.5b) (Based on the trailing twelve months to September 2019.)
Therefore, Fangdd Network Group has an ROCE of 17%.
Is Fangdd Network Group’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Fangdd Network Group’s ROCE is meaningfully better than the 9.2% average in the Interactive Media and Services industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Fangdd Network Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
You can click on the image below to see (in greater detail) how Fangdd Network Group’s past growth compares to other companies.
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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Fangdd Network Group.
How Fangdd Network Group’s Current Liabilities Impact Its 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Fangdd Network Group has total assets of CN¥3.6b and current liabilities of CN¥2.5b. Therefore its current liabilities are equivalent to approximately 70% of its total assets. Fangdd Network Group has a relatively high level of current liabilities, boosting its ROCE meaningfully.
Our Take On Fangdd Network Group’s ROCE
The ROCE would not look as appealing if the company had fewer current liabilities. There might be better investments than Fangdd Network Group out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
I will like Fangdd Network Group better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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