Today we are going to look at China Boqi Environmental (Holding) Co., Ltd. (HKG:2377) 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect 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. Ultimately, it is a useful but imperfect metric. 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 China Boqi Environmental (Holding):

0.051 = CN¥113m ÷ (CN¥3.6b - CN¥1.4b) (Based on the trailing twelve months to June 2019.)

Therefore, China Boqi Environmental (Holding) has an ROCE of 5.1%.

See our latest analysis for China Boqi Environmental (Holding)

Is China Boqi Environmental (Holding)'s ROCE Good?

One way to assess ROCE is to compare similar companies. In this analysis, China Boqi Environmental (Holding)'s ROCE appears meaningfully below the 11% average reported by the Commercial Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how China Boqi Environmental (Holding) stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

We can see that, China Boqi Environmental (Holding) currently has an ROCE of 5.1%, less than the 15% it reported 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how China Boqi Environmental (Holding)'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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for China Boqi Environmental (Holding).

What Are Current Liabilities, And How Do They Affect China Boqi Environmental (Holding)'s ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

China Boqi Environmental (Holding) has total assets of CN¥3.6b and current liabilities of CN¥1.4b. Therefore its current liabilities are equivalent to approximately 39% of its total assets. China Boqi Environmental (Holding)'s middling level of current liabilities have the effect of boosting its ROCE a bit.

Our Take On China Boqi Environmental (Holding)'s ROCE

Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. Of course, you might also be able to find a better stock than China Boqi Environmental (Holding). So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.