In This Article:
Today we are going to look at Beijing Capital International Airport Company Limited (HKG:694) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the 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 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 Beijing Capital International Airport:
0.16 = CN¥4.0b ÷ (CN¥35b - CN¥9.3b) (Based on the trailing twelve months to December 2018.)
So, Beijing Capital International Airport has an ROCE of 16%.
Check out our latest analysis for Beijing Capital International Airport
Is Beijing Capital International Airport's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Beijing Capital International Airport's ROCE is meaningfully better than the 7.1% average in the Infrastructure industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Beijing Capital International Airport sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
In our analysis, Beijing Capital International Airport's ROCE appears to be 16%, compared to 3 years ago, when its ROCE was 11%. This makes us wonder if the company is improving. The image below shows how Beijing Capital International Airport's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during 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 Beijing Capital International Airport.