Today we are going to look at Changan Minsheng APLL Logistics Co., Ltd. (HKG:1292) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First, 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.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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?

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 Changan Minsheng APLL Logistics:

0.029 = CN¥60m ÷ (CN¥4.6b - CN¥2.5b) (Based on the trailing twelve months to December 2018.)

So, Changan Minsheng APLL Logistics has an ROCE of 2.9%.

Check out our latest analysis for Changan Minsheng APLL Logistics

Does Changan Minsheng APLL Logistics Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Changan Minsheng APLL Logistics's ROCE appears meaningfully below the 6.5% average reported by the Logistics industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Changan Minsheng APLL Logistics stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.

Changan Minsheng APLL Logistics's current ROCE of 2.9% is lower than its ROCE in the past, which was 18%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Changan Minsheng APLL Logistics's ROCE compares to its industry. Click to see more on past growth.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Changan Minsheng APLL Logistics has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Changan Minsheng APLL Logistics's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Changan Minsheng APLL Logistics has total liabilities of CN¥2.5b and total assets of CN¥4.6b. As a result, its current liabilities are equal to approximately 54% of its total assets. This is a fairly high level of current liabilities, boosting Changan Minsheng APLL Logistics's ROCE.

Our Take On Changan Minsheng APLL Logistics's ROCE

Changan Minsheng APLL Logistics's ROCE is also pretty low (in absolute terms), making the stock look unattractive on this analysis. You might be able to find a better investment than Changan Minsheng APLL Logistics. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.