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Today we'll look at China Singyes New Materials Holdings Limited (HKG:8073) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into 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. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
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 Singyes New Materials Holdings:
0.11 = CN¥25m ÷ (CN¥295m - CN¥59m) (Based on the trailing twelve months to March 2019.)
So, China Singyes New Materials Holdings has an ROCE of 11%.
Is China Singyes New Materials Holdings's ROCE Good?
One way to assess ROCE is to compare similar companies. It appears that China Singyes New Materials Holdings's ROCE is fairly close to the Chemicals industry average of 11%. Regardless of where China Singyes New Materials Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that , China Singyes New Materials Holdings currently has an ROCE of 11%, less than the 17% it reported 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how China Singyes New Materials 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 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. You can check if China Singyes New Materials Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect China Singyes New Materials 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 counter this, investors can check if a company has high current liabilities relative to total assets.
China Singyes New Materials Holdings has total liabilities of CN¥59m and total assets of CN¥295m. Therefore its current liabilities are equivalent to approximately 20% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On China Singyes New Materials Holdings's ROCE
With that in mind, China Singyes New Materials Holdings's ROCE appears pretty good. There might be better investments than China Singyes New Materials Holdings out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
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 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. Thank you for reading.