Do You Know About China Jinjiang Environment Holding Company Limited’s (SGX:BWM) ROCE?
Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!
Today we’ll evaluate China Jinjiang Environment Holding Company Limited (SGX:BWM) 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 of all, we’ll work out how to 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.
What is 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. In brief, it is a useful tool, but it is not without drawbacks. 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 China Jinjiang Environment Holding:
0.085 = CN¥834m ÷ (CN¥15b – CN¥3.7b) (Based on the trailing twelve months to September 2018.)
Therefore, China Jinjiang Environment Holding has an ROCE of 8.5%.
Check out our latest analysis for China Jinjiang Environment Holding
Does China Jinjiang Environment Holding Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. It appears that China Jinjiang Environment Holding’s ROCE is fairly close to the Renewable Energy industry average of 7.4%. Separate from how China Jinjiang Environment Holding 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.
It is important to remember that ROCE shows past performance, and is 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. If China Jinjiang Environment Holding is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
China Jinjiang Environment Holding’s Current Liabilities And Their Impact On 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.
China Jinjiang Environment Holding has total assets of CN¥15b and current liabilities of CN¥3.7b. Therefore its current liabilities are equivalent to approximately 25% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
What We Can Learn From China Jinjiang Environment Holding’s ROCE
With that in mind, we’re not overly impressed with China Jinjiang Environment Holding’s ROCE, so it may not be the most appealing prospect. Of course you might be able to find a better stock than China Jinjiang Environment Holding. 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).
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 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. Thank you for reading.
