Today we’ll look at Shanghai Jin Jiang International Hotels (Group) Company Limited (HKG:2006) and reflect on its potential as an investment. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
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 Shanghai Jin Jiang International Hotels (Group):
0.048 = CN¥2.0b ÷ (CN¥59b – CN¥17b) (Based on the trailing twelve months to June 2018.)
Therefore, Shanghai Jin Jiang International Hotels (Group) has an ROCE of 4.8%.
See our latest analysis for Shanghai Jin Jiang International Hotels (Group)
Does Shanghai Jin Jiang International Hotels (Group) Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, Shanghai Jin Jiang International Hotels (Group)’s ROCE appears to be around the 5.6% average of the Hospitality industry. Regardless of how Shanghai Jin Jiang International Hotels (Group) stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
Shanghai Jin Jiang International Hotels (Group) delivered an ROCE of 4.8%, which is better than 3 years ago, as was making losses back then. That implies the business has been 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.