Today we'll evaluate China Travel International Investment Hong Kong Limited (HKG:308) to determine whether it could have potential as an investment idea. 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, 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.
Understanding 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. In brief, it is a useful tool, but it is not without drawbacks. 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 China Travel International Investment Hong Kong:
0.03 = HK$548m ÷ (HK$21b - HK$3.1b) (Based on the trailing twelve months to December 2018.)
Therefore, China Travel International Investment Hong Kong has an ROCE of 3.0%.
Does China Travel International Investment Hong Kong Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see China Travel International Investment Hong Kong's ROCE is meaningfully below the Hospitality industry average of 6.0%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how China Travel International Investment Hong Kong 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.
You can click on the image below to see (in greater detail) how China Travel International Investment Hong Kong's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and 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. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for China Travel International Investment Hong Kong.
China Travel International Investment Hong Kong's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
China Travel International Investment Hong Kong has total assets of HK$21b and current liabilities of HK$3.1b. As a result, its current liabilities are equal to approximately 15% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
The Bottom Line On China Travel International Investment Hong Kong's ROCE
China Travel International Investment Hong Kong has a poor ROCE, and there may be better investment prospects out there. You might be able to find a better investment than China Travel International Investment Hong Kong. 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).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 email@example.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.