In This Article:
Today we’ll evaluate BAIC Motor Corporation Limited (HKG:1958) 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 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.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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 BAIC Motor:
0.24 = CN¥19b ÷ (CN¥174b – CN¥84b) (Based on the trailing twelve months to September 2018.)
So, BAIC Motor has an ROCE of 24%.
Check out our latest analysis for BAIC Motor
Want to help shape the future of investing tools and platforms? Take the survey and be part of one of the most advanced studies of stock market investors to date.
Is BAIC Motor’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, BAIC Motor’s ROCE is meaningfully higher than the 4.8% average in the Auto industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, BAIC Motor’s ROCE currently appears to be excellent.
As we can see, BAIC Motor currently has an ROCE of 24% compared to its ROCE 3 years ago, which was 6.4%. This makes us wonder if the company is improving.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for BAIC Motor.