In This Article:
Today we are going to look at China Glass Holdings Limited (HKG:3300) to see whether it might be an attractive investment prospect. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we’ll work out how to calculate ROCE. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
What is 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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 Glass Holdings:
0.049 = CN¥105m ÷ (CN¥6.4b – CN¥3.3b) (Based on the trailing twelve months to June 2018.)
So, China Glass Holdings has an ROCE of 4.9%.
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Does China Glass Holdings Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, China Glass Holdings’s ROCE appears to be significantly below the 11% average in the Building industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how China Glass Holdings stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
China Glass Holdings delivered an ROCE of 4.9%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. You can check if China Glass Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.