Why Shentong Robot Education Group Company Limited’s (HKG:8206) Return On Capital Employed Is Impressive

Today we are going to look at Shentong Robot Education Group Company Limited (HKG:8206) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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?

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 Shentong Robot Education Group:

0.16 = HK$59m ÷ (HK$670m - HK$309m) (Based on the trailing twelve months to December 2019.)

Therefore, Shentong Robot Education Group has an ROCE of 16%.

Check out our latest analysis for Shentong Robot Education Group

Is Shentong Robot Education Group's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Shentong Robot Education Group's ROCE is meaningfully better than the 11% average in the Consumer Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Shentong Robot Education Group 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, Shentong Robot Education Group currently has an ROCE of 16% compared to its ROCE 3 years ago, which was 2.2%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Shentong Robot Education Group's ROCE compares to its industry. Click to see more on past growth.

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 only a point-in-time measure. You can check if Shentong Robot Education Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Do Shentong Robot Education Group's Current Liabilities Skew 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Shentong Robot Education Group has current liabilities of HK$309m and total assets of HK$670m. As a result, its current liabilities are equal to approximately 46% of its total assets. Shentong Robot Education Group has a medium level of current liabilities, which would boost the ROCE.

The Bottom Line On Shentong Robot Education Group's ROCE

Shentong Robot Education Group's ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than Shentong Robot Education Group 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.