In This Article:
Today we’ll evaluate Sinotruk (Hong Kong) Limited (HKG:3808) to determine whether it could have potential as an investment idea. 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. 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 measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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’.
How Do You Calculate Return On Capital Employed?
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 Sinotruk (Hong Kong):
0.19 = CN¥4.1b ÷ (CN¥67b – CN¥40b) (Based on the trailing twelve months to June 2018.)
Therefore, Sinotruk (Hong Kong) has an ROCE of 19%.
See our latest analysis for Sinotruk (Hong Kong)
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Does Sinotruk (Hong Kong) Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Sinotruk (Hong Kong)’s ROCE is meaningfully higher than the 10% average in the Machinery industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Sinotruk (Hong Kong) sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Our data shows that Sinotruk (Hong Kong) currently has an ROCE of 19%, compared to its ROCE of 3.4% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.