In This Article:
Today we are going to look at Shenglong Splendecor International Limited (HKG:8481) 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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 Shenglong Splendecor International:
0.095 = CN¥21m ÷ (CN¥470m - CN¥250m) (Based on the trailing twelve months to June 2019.)
So, Shenglong Splendecor International has an ROCE of 9.5%.
View our latest analysis for Shenglong Splendecor International
Does Shenglong Splendecor International Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Shenglong Splendecor International's ROCE is around the 10% average reported by the Commercial Services industry. Aside from the industry comparison, Shenglong Splendecor International's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Shenglong Splendecor International's current ROCE of 9.5% is lower than 3 years ago, when the company reported a 15% ROCE. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Shenglong Splendecor International's past growth compares to other companies.
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. ROCE is only a point-in-time measure. You can check if Shenglong Splendecor International has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.