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Is COSCO SHIPPING Energy Transportation Co., Ltd. (HKG:1138) Creating Value For Shareholders?

Simply Wall St

Today we'll look at COSCO SHIPPING Energy Transportation Co., Ltd. (HKG:1138) and reflect on its potential as an investment. 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. In brief, it is a useful tool, but it is not without drawbacks. 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 COSCO SHIPPING Energy Transportation:

0.033 = CN¥1.8b ÷ (CN¥66b - CN¥11b) (Based on the trailing twelve months to March 2019.)

So, COSCO SHIPPING Energy Transportation has an ROCE of 3.3%.

See our latest analysis for COSCO SHIPPING Energy Transportation

Does COSCO SHIPPING Energy Transportation Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. It appears that COSCO SHIPPING Energy Transportation's ROCE is fairly close to the Shipping industry average of 3.1%. Independently of how COSCO SHIPPING Energy Transportation compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. Readers may wish to look for more rewarding investments.

COSCO SHIPPING Energy Transportation's current ROCE of 3.3% is lower than its ROCE in the past, which was 5.3%, 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how COSCO SHIPPING Energy Transportation's ROCE compares to its industry, and you can click it to see more detail on its past growth.

SEHK:1138 Past Revenue and Net Income, July 25th 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for COSCO SHIPPING Energy Transportation.

Do COSCO SHIPPING Energy Transportation's Current Liabilities Skew 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

COSCO SHIPPING Energy Transportation has total liabilities of CN¥11b and total assets of CN¥66b. Therefore its current liabilities are equivalent to approximately 17% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

What We Can Learn From COSCO SHIPPING Energy Transportation's ROCE

While that is good to see, COSCO SHIPPING Energy Transportation has a low ROCE and does not look attractive in this analysis. Of course, you might also be able to find a better stock than COSCO SHIPPING Energy Transportation. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.