Today we'll evaluate Weigang Environmental Technology Holding Group Limited (HKG:1845) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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'.
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 Weigang Environmental Technology Holding Group:
0.11 = CN¥57m ÷ (CN¥661m - CN¥158m) (Based on the trailing twelve months to June 2019.)
Therefore, Weigang Environmental Technology Holding Group has an ROCE of 11%.
Does Weigang Environmental Technology Holding Group Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see Weigang Environmental Technology Holding Group's ROCE is around the 10.0% average reported by the Commercial Services industry. Separate from Weigang Environmental Technology Holding Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, Weigang Environmental Technology Holding Group currently has an ROCE of 11%, less than the 46% it reported 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Weigang Environmental Technology Holding Group's ROCE compares to its industry. Click to see more on past growth.
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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. If Weigang Environmental Technology Holding Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Weigang Environmental Technology Holding Group's Current Liabilities And Their Impact On Its 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Weigang Environmental Technology Holding Group has total assets of CN¥661m and current liabilities of CN¥158m. As a result, its current liabilities are equal to approximately 24% of its total assets. Low current liabilities are not boosting the ROCE too much.
Our Take On Weigang Environmental Technology Holding Group's ROCE
Overall, Weigang Environmental Technology Holding Group has a decent ROCE and could be worthy of further research. Weigang Environmental Technology Holding Group looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
I will like Weigang Environmental Technology Holding Group better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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