Today we'll look at China Saite Group Company Limited (HKG:153) and reflect on its potential as an investment. 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. 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. Overall, it is a valuable metric that has its flaws. 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?
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 China Saite Group:
0.082 = CN¥264m ÷ (CN¥3.8b - CN¥535m) (Based on the trailing twelve months to June 2019.)
So, China Saite Group has an ROCE of 8.2%.
See our latest analysis for China Saite Group
Is China Saite Group's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see China Saite Group's ROCE is meaningfully below the Construction industry average of 12%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Separate from how China Saite Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
China Saite Group's current ROCE of 8.2% is lower than its ROCE in the past, which was 20%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how China Saite Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is China Saite Group? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.