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A Close Look At Zhuzhou CRRC Times Electric Co., Ltd.’s (HKG:3898) 12% ROCE

Simply Wall St

Today we'll evaluate Zhuzhou CRRC Times Electric Co., Ltd. (HKG:3898) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into 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.

Understanding 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. 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.

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 Zhuzhou CRRC Times Electric:

0.12 = CN¥2.7b ÷ (CN¥31b - CN¥8.3b) (Based on the trailing twelve months to September 2019.)

Therefore, Zhuzhou CRRC Times Electric has an ROCE of 12%.

See our latest analysis for Zhuzhou CRRC Times Electric

Does Zhuzhou CRRC Times Electric Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In our analysis, Zhuzhou CRRC Times Electric's ROCE is meaningfully higher than the 8.1% average in the Electrical industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Zhuzhou CRRC Times Electric compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

Zhuzhou CRRC Times Electric's current ROCE of 12% is lower than its ROCE in the past, which was 18%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Zhuzhou CRRC Times Electric's past growth compares to other companies.

SEHK:3898 Past Revenue and Net Income, January 16th 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Zhuzhou CRRC Times Electric.

Zhuzhou CRRC Times Electric'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Zhuzhou CRRC Times Electric has total liabilities of CN¥8.3b and total assets of CN¥31b. Therefore its current liabilities are equivalent to approximately 27% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

Our Take On Zhuzhou CRRC Times Electric's ROCE

This is good to see, and with a sound ROCE, Zhuzhou CRRC Times Electric could be worth a closer look. Zhuzhou CRRC Times Electric looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.

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. Thank you for reading.