Do Huadian Fuxin Energy Corporation Limited’s (HKG:816) Returns On Capital Employed Make The Cut?
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Today we’ll evaluate Huadian Fuxin Energy Corporation Limited (HKG:816) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting 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. 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?
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 Huadian Fuxin Energy:
0.057 = CN¥4.9b ÷ (CN¥110b – CN¥24b) (Based on the trailing twelve months to June 2018.)
So, Huadian Fuxin Energy has an ROCE of 5.7%.
See our latest analysis for Huadian Fuxin Energy
Is Huadian Fuxin Energy’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Huadian Fuxin Energy’s ROCE appears to be around the 6.3% average of the Renewable Energy industry. Separate from how Huadian Fuxin Energy stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Huadian Fuxin Energy’s ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Huadian Fuxin Energy has total liabilities of CN¥24b and total assets of CN¥110b. As a result, its current liabilities are equal to approximately 22% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.
The Bottom Line On Huadian Fuxin Energy’s ROCE
With that in mind, we’re not overly impressed with Huadian Fuxin Energy’s ROCE, so it may not be the most appealing prospect. Of course you might be able to find a better stock than Huadian Fuxin Energy. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
