In This Article:
Today we'll evaluate Metallurgical Corporation of China Ltd. (HKG:1618) 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. Finally, we'll look at how its current liabilities affect its ROCE.
What is 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.
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 Metallurgical Corporation of China:
0.093 = CN¥14b ÷ (CN¥457b - CN¥307b) (Based on the trailing twelve months to September 2019.)
Therefore, Metallurgical Corporation of China has an ROCE of 9.3%.
View our latest analysis for Metallurgical Corporation of China
Does Metallurgical Corporation of China Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Metallurgical Corporation of China's ROCE appears to be significantly below the 12% average in the Construction industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Metallurgical Corporation of China 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.
The image below shows how Metallurgical Corporation of China's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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.