Today we'll look at China Chunlai Education Group Co., Ltd. (HKG:1969) and reflect on its potential as an investment. 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.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding 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. All else being equal, a better business will have a higher ROCE. 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 Chunlai Education Group:

0.17 = CN¥214m ÷ (CN¥2.1b - CN¥794m) (Based on the trailing twelve months to August 2018.)

So, China Chunlai Education Group has an ROCE of 17%.

Check out our latest analysis for China Chunlai Education Group

Is China Chunlai Education Group's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that China Chunlai Education Group's ROCE is meaningfully better than the 11% average in the Consumer Services 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. Regardless of where China Chunlai Education Group sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How China Chunlai Education Group's Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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 counter this, investors can check if a company has high current liabilities relative to total assets.

China Chunlai Education Group has total assets of CN¥2.1b and current liabilities of CN¥794m. Therefore its current liabilities are equivalent to approximately 38% of its total assets. With this level of current liabilities, China Chunlai Education Group's ROCE is boosted somewhat.

The Bottom Line On China Chunlai Education Group's ROCE

China Chunlai Education Group's ROCE does look good, but the level of current liabilities also contribute to that. China Chunlai Education Group 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.

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.