Should Tianjin Port Development Holdings Limited’s (HKG:3382) Weak Investment Returns Worry You?

Simply Wall St

Thu, Jul 18, 2019, 8:23 PM

Today we'll evaluate Tianjin Port Development Holdings Limited (HKG:3382) to determine whether it could have potential as an investment idea. 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding 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. In general, businesses with a higher ROCE are usually better quality. 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.'

So, How Do We Calculate ROCE?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Tianjin Port Development Holdings:

0.04 = HK$1.4b ÷ (HK$45b - HK$10b) (Based on the trailing twelve months to December 2018.)

So, Tianjin Port Development Holdings has an ROCE of 4.0%.

See our latest analysis for Tianjin Port Development Holdings

Is Tianjin Port Development Holdings's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, Tianjin Port Development Holdings's ROCE appears to be significantly below the 7.3% average in the Infrastructure industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Tianjin Port Development Holdings's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.

Tianjin Port Development Holdings's current ROCE of 4.0% is lower than 3 years ago, when the company reported a 7.3% 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 Tianjin Port Development Holdings's past growth compares to other companies.

SEHK:3382 Past Revenue and Net Income, July 19th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. If Tianjin Port Development Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.