Today we are going to look at Tingyi (Cayman Islands) Holding Corp. (HKG:322) 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. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting 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. 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.
So, How Do We Calculate ROCE?
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 Tingyi (Cayman Islands) Holding:
0.14 = CN¥3.9b ÷ (CN¥56b - CN¥28b) (Based on the trailing twelve months to June 2019.)
So, Tingyi (Cayman Islands) Holding has an ROCE of 14%.
Does Tingyi (Cayman Islands) Holding Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Tingyi (Cayman Islands) Holding's ROCE appears to be substantially greater than the 10% 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 Tingyi (Cayman Islands) Holding 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, Tingyi (Cayman Islands) Holding currently has an ROCE of 14% compared to its ROCE 3 years ago, which was 4.7%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Tingyi (Cayman Islands) Holding's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. 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 Tingyi (Cayman Islands) Holding.
How Tingyi (Cayman Islands) Holding's Current Liabilities Impact 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Tingyi (Cayman Islands) Holding has total liabilities of CN¥28b and total assets of CN¥56b. As a result, its current liabilities are equal to approximately 50% of its total assets. With this level of current liabilities, Tingyi (Cayman Islands) Holding's ROCE is boosted somewhat.
Our Take On Tingyi (Cayman Islands) Holding's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. There might be better investments than Tingyi (Cayman Islands) Holding 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 are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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