In This Article:
Today we'll look at Beijing Beida Jade Bird Universal Sci-Tech Company Limited (HKG:8095) and reflect on its potential as an investment. 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.
First of all, we'll work out how to 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.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 Beida Jade Bird Universal Sci-Tech:
0.16 = CN¥451m ÷ (CN¥3.8b - CN¥880m) (Based on the trailing twelve months to June 2019.)
So, Beijing Beida Jade Bird Universal Sci-Tech has an ROCE of 16%.
See our latest analysis for Beijing Beida Jade Bird Universal Sci-Tech
Does Beijing Beida Jade Bird Universal Sci-Tech Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Beijing Beida Jade Bird Universal Sci-Tech's ROCE appears to be substantially greater than the 6.0% average in the Software industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Beijing Beida Jade Bird Universal Sci-Tech's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
The image below shows how Beijing Beida Jade Bird Universal Sci-Tech's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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, after all, simply a snap shot of a single year. You can check if Beijing Beida Jade Bird Universal Sci-Tech has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.