In This Article:
Today we are going to look at Beijing Enterprises Holdings Limited (HKG:392) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
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.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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'.
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 Beijing Enterprises Holdings:
0.026 = HK$3.9b ÷ (HK$181b - HK$28b) (Based on the trailing twelve months to June 2019.)
So, Beijing Enterprises Holdings has an ROCE of 2.6%.
Check out our latest analysis for Beijing Enterprises Holdings
Does Beijing Enterprises Holdings Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Beijing Enterprises Holdings's ROCE appears to be significantly below the 9.4% average in the Gas Utilities industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Beijing Enterprises Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.0% available in government bonds. Readers may wish to look for more rewarding investments.
You can click on the image below to see (in greater detail) how Beijing Enterprises Holdings's past growth compares to other companies.
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. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.