Today we are going to look at Shougang Concord Century Holdings Limited (HKG:103) to see whether it might be an attractive investment prospect. 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.
Firstly, 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.
Return On Capital Employed (ROCE): What is it?
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. 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 Shougang Concord Century Holdings:
0.083 = HK$133m ÷ (HK$3.3b - HK$1.7b) (Based on the trailing twelve months to June 2019.)
So, Shougang Concord Century Holdings has an ROCE of 8.3%.
Does Shougang Concord Century Holdings Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. It appears that Shougang Concord Century Holdings's ROCE is fairly close to the Metals and Mining industry average of 7.8%. Separate from how Shougang Concord Century Holdings stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
Shougang Concord Century Holdings has an ROCE of 8.3%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving. The image below shows how Shougang Concord Century Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is 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 only a point-in-time measure. We note Shougang Concord Century Holdings could be considered a cyclical business. You can check if Shougang Concord Century Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Shougang Concord Century Holdings's Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Shougang Concord Century Holdings has total assets of HK$3.3b and current liabilities of HK$1.7b. As a result, its current liabilities are equal to approximately 51% of its total assets. Shougang Concord Century Holdings has a fairly high level of current liabilities, meaningfully impacting its ROCE.
The Bottom Line On Shougang Concord Century Holdings's ROCE
Despite this, the company also has a uninspiring ROCE, which is not an ideal combination in this analysis. You might be able to find a better investment than Shougang Concord Century Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
I will like Shougang Concord Century Holdings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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