In This Article:
Today we are going to look at Tonking New Energy Group Holdings Limited (HKG:8326) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting 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. 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 Tonking New Energy Group Holdings:
0.11 = HK$25m ÷ (HK$487m - HK$256m) (Based on the trailing twelve months to June 2019.)
So, Tonking New Energy Group Holdings has an ROCE of 11%.
View our latest analysis for Tonking New Energy Group Holdings
Does Tonking New Energy Group Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, Tonking New Energy Group Holdings's ROCE is meaningfully higher than the 5.0% average in the Hospitality industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Tonking New Energy Group Holdings's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Tonking New Energy Group Holdings's current ROCE of 11% is lower than 3 years ago, when the company reported a 64% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Tonking New Energy Group Holdings's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Tonking New Energy Group Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.