Today we'll evaluate YCIH Green High-Performance Concrete Company Limited (HKG:1847) to determine whether it could have potential as an investment idea. 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. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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'.
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for YCIH Green High-Performance Concrete:
0.24 = CN¥236m ÷ (CN¥3.2b - CN¥2.2b) (Based on the trailing twelve months to December 2018.)
So, YCIH Green High-Performance Concrete has an ROCE of 24%.
Is YCIH Green High-Performance Concrete's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. It appears that YCIH Green High-Performance Concrete's ROCE is fairly close to the Basic Materials industry average of 21%. Setting aside the comparison to its industry for a moment, YCIH Green High-Performance Concrete's ROCE in absolute terms currently looks quite high.
You can click on the image below to see (in greater detail) how YCIH Green High-Performance Concrete's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. If YCIH Green High-Performance Concrete is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do YCIH Green High-Performance Concrete's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
YCIH Green High-Performance Concrete has total assets of CN¥3.2b and current liabilities of CN¥2.2b. Therefore its current liabilities are equivalent to approximately 69% of its total assets. YCIH Green High-Performance Concrete boasts an attractive ROCE, even after considering the boost from high current liabilities.
What We Can Learn From YCIH Green High-Performance Concrete's ROCE
So we would be interested in doing more research here -- there may be an opportunity! YCIH Green High-Performance Concrete 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.
I will like YCIH Green High-Performance Concrete 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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