Today we'll evaluate Canvest Environmental Protection Group Company Limited (HKG:1381) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we'll go over how we 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 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. Overall, it is a valuable metric that has its flaws. 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'.
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 Canvest Environmental Protection Group:
0.11 = HK$1.1b ÷ (HK$12b - HK$1.9b) (Based on the trailing twelve months to June 2019.)
Therefore, Canvest Environmental Protection Group has an ROCE of 11%.
Does Canvest Environmental Protection Group Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Canvest Environmental Protection Group's ROCE appears to be substantially greater than the 7.1% average in the Renewable Energy industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Canvest Environmental Protection Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
You can see in the image below how Canvest Environmental Protection Group's ROCE compares to its industry. Click to see more on past growth.
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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Canvest Environmental Protection Group.
How Canvest Environmental Protection Group's Current Liabilities Impact 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. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Canvest Environmental Protection Group has total liabilities of HK$1.9b and total assets of HK$12b. As a result, its current liabilities are equal to approximately 15% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
Our Take On Canvest Environmental Protection Group's ROCE
Overall, Canvest Environmental Protection Group has a decent ROCE and could be worthy of further research. There might be better investments than Canvest Environmental Protection 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 Canvest Environmental Protection 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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