Today we are going to look at Shenzhou International Group Holdings Limited (HKG:2313) to see whether it might be an attractive investment prospect. 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.

Firstly, 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.

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

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

So, How Do We Calculate ROCE?

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 Shenzhou International Group Holdings:

0.19 = CN¥4.6b ÷ (CN¥28b - CN¥4.3b) (Based on the trailing twelve months to June 2019.)

So, Shenzhou International Group Holdings has an ROCE of 19%.

Check out our latest analysis for Shenzhou International Group Holdings

Is Shenzhou International Group Holdings's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Shenzhou International Group Holdings's ROCE is meaningfully better than the 9.6% average in the Luxury industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Shenzhou International Group Holdings compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

The image below shows how Shenzhou International Group Holdings's ROCE compares to its industry, and you can click it to see more detail on its 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. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Shenzhou International Group Holdings.

What Are Current Liabilities, And How Do They Affect Shenzhou International Group Holdings's 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.

Shenzhou International Group Holdings has current liabilities of CN¥4.3b and total assets of CN¥28b. Therefore its current liabilities are equivalent to approximately 15% of its total assets. Low current liabilities are not boosting the ROCE too much.

Our Take On Shenzhou International Group Holdings's ROCE

This is good to see, and with a sound ROCE, Shenzhou International Group Holdings could be worth a closer look. Shenzhou International Group Holdings shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

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.