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Today we are going to look at COSCO SHIPPING Ports Limited (HKG:1199) to see whether it might be an attractive investment prospect. 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.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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 COSCO SHIPPING Ports:
0.025 = US$204m ÷ (US$9.0b - US$781m) (Based on the trailing twelve months to December 2018.)
So, COSCO SHIPPING Ports has an ROCE of 2.5%.
Is COSCO SHIPPING Ports's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, COSCO SHIPPING Ports's ROCE appears meaningfully below the 8.1% average reported by the Infrastructure industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how COSCO SHIPPING Ports 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.
As we can see, COSCO SHIPPING Ports currently has an ROCE of 2.5% compared to its ROCE 3 years ago, which was 1.6%. This makes us think the business might be improving.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for COSCO SHIPPING Ports.
Do COSCO SHIPPING Ports'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 Ports has total assets of US$9.0b and current liabilities of US$781m. Therefore its current liabilities are equivalent to approximately 8.6% of its total assets. With barely any current liabilities, there is minimal impact on COSCO SHIPPING Ports's admittedly low ROCE.
Our Take On COSCO SHIPPING Ports's ROCE
Nonetheless, there may be better places to invest your capital. But note: COSCO SHIPPING Ports may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
I will like COSCO SHIPPING Ports better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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 email@example.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.