Evaluating Shinelong Automotive Lightweight Application Limited’s (HKG:1930) Investments In Its Business

Simply Wall St

Today we'll look at Shinelong Automotive Lightweight Application Limited (HKG:1930) and reflect on its potential as an investment. 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. Then we'll determine how its current liabilities are affecting its ROCE.

What is 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. Generally speaking a higher ROCE is better. 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 Shinelong Automotive Lightweight Application:

0.11 = CN¥30m ÷ (CN¥417m - CN¥137m) (Based on the trailing twelve months to December 2019.)

Therefore, Shinelong Automotive Lightweight Application has an ROCE of 11%.

See our latest analysis for Shinelong Automotive Lightweight Application

Is Shinelong Automotive Lightweight Application's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Shinelong Automotive Lightweight Application's ROCE appears to be around the 11% average of the Auto Components industry. Independently of how Shinelong Automotive Lightweight Application compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

Shinelong Automotive Lightweight Application's current ROCE of 11% is lower than its ROCE in the past, which was 34%, 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how Shinelong Automotive Lightweight Application's ROCE compares to its industry. Click to see more on past growth.

SEHK:1930 Past Revenue and Net Income March 30th 2020

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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 Shinelong Automotive Lightweight Application has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Do Shinelong Automotive Lightweight Application's Current Liabilities Skew Its ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.

Shinelong Automotive Lightweight Application has total assets of CN¥417m and current liabilities of CN¥137m. As a result, its current liabilities are equal to approximately 33% of its total assets. Shinelong Automotive Lightweight Application has a middling amount of current liabilities, increasing its ROCE somewhat.

Our Take On Shinelong Automotive Lightweight Application's ROCE

Shinelong Automotive Lightweight Application's ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than Shinelong Automotive Lightweight Application out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.