In This Article:
Today we'll evaluate Shanghai Industrial Holdings Limited (HKG:363) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared 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 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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?
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 Shanghai Industrial Holdings:
0.07 = HK$8.3b ÷ (HK$167b - HK$50b) (Based on the trailing twelve months to December 2018.)
So, Shanghai Industrial Holdings has an ROCE of 7.0%.
Check out our latest analysis for Shanghai Industrial Holdings
Is Shanghai Industrial Holdings's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Shanghai Industrial Holdings's ROCE is meaningfully better than the 3.6% average in the Industrials 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. Aside from the industry comparison, Shanghai Industrial Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
We can see that , Shanghai Industrial Holdings currently has an ROCE of 7.0% compared to its ROCE 3 years ago, which was 4.7%. This makes us think the business might be improving. The image below shows how Shanghai Industrial Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.