In This Article:
Today we are going to look at China New Higher Education Group Limited (HKG:2001) to see whether it might be an attractive investment prospect. 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.
Firstly, we’ll go over how we calculate ROCE. 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.
Return On Capital Employed (ROCE): What is it?
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. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 New Higher Education Group:
0.077 = CN¥166m ÷ (CN¥3.6b – CN¥1.1b) (Based on the trailing twelve months to June 2018.)
So, China New Higher Education Group has an ROCE of 7.7%.
Check out our latest analysis for China New Higher Education Group
Does China New Higher Education Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, China New Higher Education Group’s ROCE appears meaningfully below the 13% average reported by the Consumer Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Setting aside the industry comparison for now, China New Higher Education Group’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.
As we can see, China New Higher Education Group currently has an ROCE of 7.7%, less than the 12% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.
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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.