Should You Worry About Pingtan Marine Enterprise Ltd.’s (NASDAQ:PME) ROCE?
Today we are going to look at Pingtan Marine Enterprise Ltd. (NASDAQ:PME) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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 Pingtan Marine Enterprise:
0.053 = US$17m ÷ (US$479m - US$161m) (Based on the trailing twelve months to March 2020.)
So, Pingtan Marine Enterprise has an ROCE of 5.3%.
See our latest analysis for Pingtan Marine Enterprise
Is Pingtan Marine Enterprise's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Pingtan Marine Enterprise's ROCE is meaningfully below the Food industry average of 8.9%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Aside from the industry comparison, Pingtan Marine Enterprise'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.
Pingtan Marine Enterprise has an ROCE of 5.3%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving. You can click on the image below to see (in greater detail) how Pingtan Marine Enterprise'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. ROCE is only a point-in-time measure. How cyclical is Pingtan Marine Enterprise? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How Pingtan Marine Enterprise'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.
Pingtan Marine Enterprise has current liabilities of US$161m and total assets of US$479m. As a result, its current liabilities are equal to approximately 34% of its total assets. Pingtan Marine Enterprise's middling level of current liabilities have the effect of boosting its ROCE a bit.
Our Take On Pingtan Marine Enterprise's ROCE
With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. Of course, you might also be able to find a better stock than Pingtan Marine Enterprise. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
