In This Article:
Today we’ll evaluate Dalian Port (PDA) Company Limited (HKG:2880) 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, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting 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. 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.’
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 Dalian Port (PDA):
0.027 = CN¥799m ÷ (CN¥35b – CN¥5.2b) (Based on the trailing twelve months to September 2018.)
So, Dalian Port (PDA) has an ROCE of 2.7%.
Check out our latest analysis for Dalian Port (PDA)
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Is Dalian Port (PDA)’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Dalian Port (PDA)’s ROCE appears meaningfully below the 7.1% average reported by the Infrastructure industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Dalian Port (PDA)’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
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 only a point-in-time measure. How cyclical is Dalian Port (PDA)? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Dalian Port (PDA)’s ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.