Are China Maple Leaf Educational Systems Limited’s (HKG:1317) Returns Worth Your While?
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Today we’ll look at China Maple Leaf Educational Systems Limited (HKG:1317) 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. 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.
What is 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. In general, businesses with a higher ROCE are usually better quality. 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?
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 China Maple Leaf Educational Systems:
0.12 = CN¥485m ÷ (CN¥5.8b – CN¥1.9b) (Based on the trailing twelve months to August 2018.)
Therefore, China Maple Leaf Educational Systems has an ROCE of 12%.
See our latest analysis for China Maple Leaf Educational Systems
Is China Maple Leaf Educational Systems’s ROCE Good?
One way to assess ROCE is to compare similar companies. It appears that China Maple Leaf Educational Systems’s ROCE is fairly close to the Consumer Services industry average of 13%. Regardless of where China Maple Leaf Educational Systems sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
As we can see, China Maple Leaf Educational Systems currently has an ROCE of 12% compared to its ROCE 3 years ago, which was 9.8%. This makes us wonder if the company is improving.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for China Maple Leaf Educational Systems.
How China Maple Leaf Educational Systems’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.
China Maple Leaf Educational Systems has total assets of CN¥5.8b and current liabilities of CN¥1.9b. As a result, its current liabilities are equal to approximately 32% of its total assets. China Maple Leaf Educational Systems has a medium level of current liabilities, which would boost the ROCE.
What We Can Learn From China Maple Leaf Educational Systems’s ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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.
