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Don’t Buy COSCO SHIPPING Holdings Co., Ltd. (HKG:1919) Until You Understand Its ROCE

Simply Wall St

Today we'll evaluate COSCO SHIPPING Holdings Co., Ltd. (HKG:1919) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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?

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 COSCO SHIPPING Holdings:

0.037 = CN¥7.0b ÷ (CN¥264b - CN¥74b) (Based on the trailing twelve months to September 2019.)

So, COSCO SHIPPING Holdings has an ROCE of 3.7%.

See our latest analysis for COSCO SHIPPING Holdings

Is COSCO SHIPPING Holdings's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, COSCO SHIPPING Holdings's ROCE appears to be around the 3.2% average of the Shipping industry. Regardless of how COSCO SHIPPING Holdings stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.

COSCO SHIPPING Holdings reported an ROCE of 3.7% -- better than 3 years ago, when the company didn't make a profit. This makes us wonder if the company is improving. You can see in the image below how COSCO SHIPPING Holdings's ROCE compares to its industry. Click to see more on past growth.

SEHK:1919 Past Revenue and Net Income, February 29th 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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, 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 COSCO SHIPPING Holdings.

What Are Current Liabilities, And How Do They Affect COSCO SHIPPING Holdings's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 Holdings has total assets of CN¥264b and current liabilities of CN¥74b. As a result, its current liabilities are equal to approximately 28% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.

The Bottom Line On COSCO SHIPPING Holdings's ROCE

COSCO SHIPPING Holdings has a poor ROCE, and there may be better investment prospects out there. Of course, you might also be able to find a better stock than COSCO SHIPPING Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.