Why China Parenting Network Holdings Limited’s (HKG:1736) Use Of Investor Capital Doesn’t Look Great
Today we are going to look at China Parenting Network Holdings Limited (HKG:1736) to see whether it might be an attractive investment prospect. 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. Then we'll determine how its current liabilities are affecting 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. 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?
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 China Parenting Network Holdings:
0.044 = CN¥19m ÷ (CN¥501m - CN¥63m) (Based on the trailing twelve months to June 2019.)
Therefore, China Parenting Network Holdings has an ROCE of 4.4%.
View our latest analysis for China Parenting Network Holdings
Is China Parenting Network Holdings's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see China Parenting Network Holdings's ROCE is meaningfully below the Interactive Media and Services industry average of 14%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside China Parenting Network Holdings's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
We can see that, China Parenting Network Holdings currently has an ROCE of 4.4%, less than the 9.7% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how China Parenting Network 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 only a point-in-time measure. You can check if China Parenting Network 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 Parenting Network Holdings'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. 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.
China Parenting Network Holdings has total liabilities of CN¥63m and total assets of CN¥501m. Therefore its current liabilities are equivalent to approximately 13% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.
Our Take On China Parenting Network Holdings's ROCE
While that is good to see, China Parenting Network Holdings has a low ROCE and does not look attractive in this analysis. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
