In This Article:
Today we'll look at Prinx Chengshan (Cayman) Holding Limited (HKG:1809) and reflect on its potential as an investment. 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.
Firstly, we'll go over how we 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.
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. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
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 Prinx Chengshan (Cayman) Holding:
0.16 = CN¥524m ÷ (CN¥5.4b - CN¥2.2b) (Based on the trailing twelve months to June 2019.)
So, Prinx Chengshan (Cayman) Holding has an ROCE of 16%.
View our latest analysis for Prinx Chengshan (Cayman) Holding
Does Prinx Chengshan (Cayman) Holding Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Prinx Chengshan (Cayman) Holding's ROCE is meaningfully higher than the 11% average in the Auto Components industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Prinx Chengshan (Cayman) Holding compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Prinx Chengshan (Cayman) Holding's current ROCE of 16% is lower than 3 years ago, when the company reported a 27% ROCE. This makes us wonder if the business is facing new challenges. You can see in the image below how Prinx Chengshan (Cayman) Holding's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Prinx Chengshan (Cayman) Holding.