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Today we are going to look at BAIC Motor Corporation Limited (HKG:1958) 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. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. 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 BAIC Motor:
0.23 = CN¥21b ÷ (CN¥172b - CN¥80b) (Based on the trailing twelve months to December 2018.)
Therefore, BAIC Motor has an ROCE of 23%.
See our latest analysis for BAIC Motor
Does BAIC Motor Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that BAIC Motor's ROCE is meaningfully better than the 5.1% average in the Auto industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, BAIC Motor's ROCE is currently very good.
In our analysis, BAIC Motor's ROCE appears to be 23%, compared to 3 years ago, when its ROCE was 7.4%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how BAIC Motor's past growth compares to other companies.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for BAIC Motor.