Yahoo Finanza Is Beijing Jingkelong Company Limited (HKG:814) Better Than Average At Deploying Capital?
Today we'll evaluate Beijing Jingkelong Company Limited (HKG:814) to determine whether it could have potential as an investment idea. 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 up, we'll look at what ROCE is and how we calculate it. 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 is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
So, How Do We Calculate ROCE?
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 Beijing Jingkelong:
0.094 = CN¥340m ÷ (CN¥8.5b - CN¥4.9b) (Based on the trailing twelve months to March 2020.)
Therefore, Beijing Jingkelong has an ROCE of 9.4%.
See our latest analysis for Beijing Jingkelong
Is Beijing Jingkelong's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Beijing Jingkelong's ROCE appears to be around the 9.4% average of the Consumer Retailing industry. Setting aside the industry comparison for now, Beijing Jingkelong's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
You can click on the image below to see (in greater detail) how Beijing Jingkelong's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Beijing Jingkelong.
Do Beijing Jingkelong's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Beijing Jingkelong has total assets of CN¥8.5b and current liabilities of CN¥4.9b. Therefore its current liabilities are equivalent to approximately 58% of its total assets. Beijing Jingkelong's current liabilities are fairly high, making its ROCE look better than otherwise.
The Bottom Line On Beijing Jingkelong's ROCE
Even so, the company reports a mediocre ROCE, and there may be better investments out there. You might be able to find a better investment than Beijing Jingkelong. 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).
I will like Beijing Jingkelong better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.
