Does CGN New Energy Holdings Co., Ltd. (HKG:1811) Create Value For Shareholders?

Simply Wall St

Tue, Mar 26, 2019, 6:53 PM

Today we'll evaluate CGN New Energy Holdings Co., Ltd. (HKG:1811) to determine whether it could have potential as an investment idea. 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding 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.'

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 CGN New Energy Holdings:

0.06 = US$199m ÷ (US$4.1b - US$806m) (Based on the trailing twelve months to December 2018.)

Therefore, CGN New Energy Holdings has an ROCE of 6.0%.

See our latest analysis for CGN New Energy Holdings

Does CGN New Energy Holdings Have A Good ROCE?

One way to assess ROCE is to compare similar companies. We can see CGN New Energy Holdings's ROCE is around the 6.4% average reported by the Renewable Energy industry. Aside from the industry comparison, CGN New Energy Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

As we can see, CGN New Energy Holdings currently has an ROCE of 6.0% compared to its ROCE 3 years ago, which was 4.7%. This makes us think the business might be improving.

SEHK:1811 Past Revenue and Net Income, March 27th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the 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 CGN New Energy Holdings.