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Today we'll evaluate Beijing Enterprises Clean Energy Group Limited (HKG:1250) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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.

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 Beijing Enterprises Clean Energy Group:

0.071 = HK$2.4b ÷ (HK$50b - HK$16b) (Based on the trailing twelve months to June 2019.)

Therefore, Beijing Enterprises Clean Energy Group has an ROCE of 7.1%.

Check out our latest analysis for Beijing Enterprises Clean Energy Group

Is Beijing Enterprises Clean Energy Group's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. We can see Beijing Enterprises Clean Energy Group's ROCE is around the 6.8% average reported by the Renewable Energy industry. Aside from the industry comparison, Beijing Enterprises Clean Energy Group's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

We can see that, Beijing Enterprises Clean Energy Group currently has an ROCE of 7.1% compared to its ROCE 3 years ago, which was 3.9%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Beijing Enterprises Clean Energy Group's ROCE compares to its industry. Click to see more on past growth.

SEHK:1250 Past Revenue and Net Income, September 27th 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 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.

Do Beijing Enterprises Clean Energy Group's Current Liabilities Skew Its ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Beijing Enterprises Clean Energy Group has total assets of HK$50b and current liabilities of HK$16b. Therefore its current liabilities are equivalent to approximately 31% of its total assets. Beijing Enterprises Clean Energy Group's middling level of current liabilities have the effect of boosting its ROCE a bit.

What We Can Learn From Beijing Enterprises Clean Energy Group's ROCE

Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. You might be able to find a better investment than Beijing Enterprises Clean Energy Group. 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).

If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.