U.S. Markets open in 1 hr 6 mins

Why We’re Not Impressed By China Jicheng Holdings Limited’s (HKG:1027) 5.1% ROCE

Simply Wall St

Today we'll look at China Jicheng Holdings Limited (HKG:1027) and reflect on its potential as an investment. 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.

First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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 China Jicheng Holdings:

0.051 = CN¥24m ÷ (CN¥741m - CN¥269m) (Based on the trailing twelve months to June 2019.)

So, China Jicheng Holdings has an ROCE of 5.1%.

Check out our latest analysis for China Jicheng Holdings

Is China Jicheng Holdings's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, China Jicheng Holdings's ROCE appears meaningfully below the 9.6% average reported by the Luxury industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, China Jicheng Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

China Jicheng Holdings's current ROCE of 5.1% is lower than 3 years ago, when the company reported a 15% ROCE. Therefore we wonder if the company is facing new headwinds. You can see in the image below how China Jicheng Holdings's ROCE compares to its industry. Click to see more on past growth.

SEHK:1027 Past Revenue and Net Income, January 31st 2020

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. You can check if China Jicheng Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How China Jicheng Holdings's Current Liabilities Impact 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

China Jicheng Holdings has total assets of CN¥741m and current liabilities of CN¥269m. As a result, its current liabilities are equal to approximately 36% of its total assets. China Jicheng Holdings's ROCE is improved somewhat by its moderate amount of current liabilities.

Our Take On China Jicheng Holdings's ROCE

With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. You might be able to find a better investment than China Jicheng Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like China Jicheng Holdings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.