Today we'll look at Tenfu (Cayman) Holdings Company Limited (HKG:6868) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

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.

Understanding 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. 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?

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 Tenfu (Cayman) Holdings:

0.19 = CN¥381m ÷ (CN¥2.8b - CN¥798m) (Based on the trailing twelve months to June 2019.)

Therefore, Tenfu (Cayman) Holdings has an ROCE of 19%.

View our latest analysis for Tenfu (Cayman) Holdings

Does Tenfu (Cayman) Holdings Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Tenfu (Cayman) Holdings's ROCE appears to be substantially greater than the 9.6% average in the Food industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Tenfu (Cayman) Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

We can see that, Tenfu (Cayman) Holdings currently has an ROCE of 19% compared to its ROCE 3 years ago, which was 12%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Tenfu (Cayman) Holdings's past growth compares to other companies.

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 only a point-in-time measure. How cyclical is Tenfu (Cayman) Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

How Tenfu (Cayman) Holdings's Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

Tenfu (Cayman) Holdings has total liabilities of CN¥798m and total assets of CN¥2.8b. As a result, its current liabilities are equal to approximately 29% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

The Bottom Line On Tenfu (Cayman) Holdings's ROCE

Overall, Tenfu (Cayman) Holdings has a decent ROCE and could be worthy of further research. Tenfu (Cayman) Holdings looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

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 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.