Today we’ll look at BII Railway Transportation Technology Holdings Company Limited (HKG:1522) and reflect on its potential as an investment. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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?
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 BII Railway Transportation Technology Holdings:
0.006 = HK$30m ÷ (HK$2.6b – HK$435m) (Based on the trailing twelve months to June 2018.)
So, BII Railway Transportation Technology Holdings has an ROCE of 0.6%.
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Is BII Railway Transportation Technology Holdings’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, BII Railway Transportation Technology Holdings’s ROCE appears meaningfully below the 2.9% average reported by the Software industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how BII Railway Transportation Technology Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.2% available in government bonds. Readers may wish to look for more rewarding investments.
BII Railway Transportation Technology Holdings’s current ROCE of 0.6% is lower than its ROCE in the past, which was 5.1%, 3 years ago. This makes us wonder if the business is facing new challenges.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. You can check if BII Railway Transportation Technology Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
BII Railway Transportation Technology Holdings’s Current Liabilities And Their Impact On 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
BII Railway Transportation Technology Holdings has total liabilities of HK$435m and total assets of HK$2.6b. As a result, its current liabilities are equal to approximately 16% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
What We Can Learn From BII Railway Transportation Technology Holdings’s ROCE
While that is good to see, BII Railway Transportation Technology Holdings has a low ROCE and does not look attractive in this analysis. You might be able to find a better buy than BII Railway Transportation Technology Holdings. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.