Do You Know About Zheneng Jinjiang Environment Holding Company Limited’s (SGX:BWM) ROCE?
Today we'll look at Zheneng Jinjiang Environment Holding Company Limited (SGX:BWM) 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. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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.
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 Zheneng Jinjiang Environment Holding:
0.068 = CN¥738m ÷ (CN¥16b - CN¥5.3b) (Based on the trailing twelve months to September 2019.)
So, Zheneng Jinjiang Environment Holding has an ROCE of 6.8%.
See our latest analysis for Zheneng Jinjiang Environment Holding
Does Zheneng Jinjiang Environment Holding Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Zheneng Jinjiang Environment Holding's ROCE appears to be around the 7.5% average of the Renewable Energy industry. Setting aside the industry comparison for now, Zheneng Jinjiang Environment Holding's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
Zheneng Jinjiang Environment Holding's current ROCE of 6.8% is lower than 3 years ago, when the company reported a 12% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Zheneng Jinjiang Environment Holding's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Zheneng Jinjiang Environment Holding? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Zheneng Jinjiang Environment Holding's Current Liabilities Skew 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Zheneng Jinjiang Environment Holding has current liabilities of CN¥5.3b and total assets of CN¥16b. Therefore its current liabilities are equivalent to approximately 33% of its total assets. Zheneng Jinjiang Environment Holding's middling level of current liabilities have the effect of boosting its ROCE a bit.
The Bottom Line On Zheneng Jinjiang Environment Holding's ROCE
Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
