Is COSCO SHIPPING Ports Limited (HKG:1199) Investing Your Capital Efficiently?

Simply Wall St

Today we are going to look at COSCO SHIPPING Ports Limited (HKG:1199) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to 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.

Return On Capital Employed (ROCE): What is it?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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?

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 COSCO SHIPPING Ports:

0.023 = US$211m ÷ (US$10b - US$1.1b) (Based on the trailing twelve months to September 2019.)

Therefore, COSCO SHIPPING Ports has an ROCE of 2.3%.

Check out our latest analysis for COSCO SHIPPING Ports

Does COSCO SHIPPING Ports Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, COSCO SHIPPING Ports's ROCE appears to be significantly below the 7.6% average in the Infrastructure industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside COSCO SHIPPING Ports's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.

COSCO SHIPPING Ports's current ROCE of 2.3% is lower than its ROCE in the past, which was 3.4%, 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how COSCO SHIPPING Ports's past growth compares to other companies.

SEHK:1199 Past Revenue and Net Income, December 2nd 2019

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for COSCO SHIPPING Ports.

What Are Current Liabilities, And How Do They Affect COSCO SHIPPING Ports's ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

COSCO SHIPPING Ports has total liabilities of US$1.1b and total assets of US$10b. Therefore its current liabilities are equivalent to approximately 10% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

Our Take On COSCO SHIPPING Ports's ROCE

While that is good to see, COSCO SHIPPING Ports has a low ROCE and does not look attractive in this analysis. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

COSCO SHIPPING Ports is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.

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.

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. Thank you for reading.