In This Article:
Today we'll look at Weigang Environmental Technology Holding Group Limited (HKG:1845) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. In general, businesses with a higher ROCE are usually better quality. 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?
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 Weigang Environmental Technology Holding Group:
0.30 = CN¥78m ÷ (CN¥470m - CN¥211m) (Based on the trailing twelve months to December 2018.)
So, Weigang Environmental Technology Holding Group has an ROCE of 30%.
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Check out our latest analysis for Weigang Environmental Technology Holding Group
Does Weigang Environmental Technology Holding Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Weigang Environmental Technology Holding Group's ROCE appears to be substantially greater than the 10% average in the Commercial Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Weigang Environmental Technology Holding Group's ROCE is currently very good.
Weigang Environmental Technology Holding Group's current ROCE of 30% is lower than its ROCE in the past, which was 61%, 3 years ago. Therefore we wonder if the company is facing new headwinds.
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 only a point-in-time measure. You can check if Weigang Environmental Technology Holding Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.