In This Article:
Today we'll evaluate Hebei Yichen Industrial Group Corporation Limited (HKG:1596) 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. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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 Hebei Yichen Industrial Group:
0.084 = CN¥173m ÷ (CN¥2.6b - CN¥549m) (Based on the trailing twelve months to June 2019.)
Therefore, Hebei Yichen Industrial Group has an ROCE of 8.4%.
See our latest analysis for Hebei Yichen Industrial Group
Does Hebei Yichen Industrial Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Hebei Yichen Industrial Group's ROCE appears to be significantly below the 11% average in the Machinery industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Hebei Yichen Industrial Group's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
Hebei Yichen Industrial Group's current ROCE of 8.4% is lower than 3 years ago, when the company reported a 34% ROCE. Therefore we wonder if the company is facing new headwinds. The image below shows how Hebei Yichen Industrial Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. You can check if Hebei Yichen Industrial Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.