In This Article:
Today we'll look at COSCO SHIPPING Holdings Co., Ltd. (HKG:1919) and reflect on its potential as an investment. 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. Finally, we'll look at how its current liabilities affect 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. Generally speaking a higher ROCE is better. 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'.
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 COSCO SHIPPING Holdings:
0.027 = CN¥4.4b ÷ (CN¥256b - CN¥90b) (Based on the trailing twelve months to March 2019.)
Therefore, COSCO SHIPPING Holdings has an ROCE of 2.7%.
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Does COSCO SHIPPING Holdings Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see COSCO SHIPPING Holdings's ROCE is around the 3.1% average reported by the Shipping industry. Independently of how COSCO SHIPPING Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. Readers may wish to look for more rewarding investments.
COSCO SHIPPING Holdings has an ROCE of 2.7%, but it didn't have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for COSCO SHIPPING Holdings.