In This Article:
Today we are going to look at Xinyi Automobile Glass Hong Kong Enterprises Limited (HKG:8328) to see whether it might be an attractive investment prospect. 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed 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.
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 Xinyi Automobile Glass Hong Kong Enterprises:
0.036 = HK$14m ÷ (HK$460m - HK$68m) (Based on the trailing twelve months to June 2019.)
So, Xinyi Automobile Glass Hong Kong Enterprises has an ROCE of 3.6%.
Check out our latest analysis for Xinyi Automobile Glass Hong Kong Enterprises
Is Xinyi Automobile Glass Hong Kong Enterprises's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see Xinyi Automobile Glass Hong Kong Enterprises's ROCE is meaningfully below the Auto Components industry average of 11%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Xinyi Automobile Glass Hong Kong Enterprises 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.
Xinyi Automobile Glass Hong Kong Enterprises has an ROCE of 3.6%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That suggests the business has returned to profitability. You can see in the image below how Xinyi Automobile Glass Hong Kong Enterprises's ROCE compares to its industry. Click to see more on 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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Xinyi Automobile Glass Hong Kong Enterprises? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.