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Is Fosun International Limited (HKG:656) Investing Your Capital Efficiently?

Today we'll look at Fosun International Limited (HKG:656) 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

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. 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?

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 Fosun International:

0.022 = CN¥9.9b ÷ (CN¥716b - CN¥268b) (Based on the trailing twelve months to December 2019.)

So, Fosun International has an ROCE of 2.2%.

See our latest analysis for Fosun International

Is Fosun International's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. We can see Fosun International's ROCE is meaningfully below the Industrials industry average of 3.1%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Fosun International compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.6% available in government bonds. It is likely that there are more attractive prospects out there.

Fosun International has an ROCE of 2.2%, but it didn't have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving. The image below shows how Fosun International's ROCE compares to its industry, and you can click it to see more detail on its past growth.

SEHK:656 Past Revenue and Net Income April 3rd 2020
SEHK:656 Past Revenue and Net Income April 3rd 2020

When considering this metric, keep in mind that it is backwards looking, and 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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Fosun International.

Fosun International'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 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Fosun International has total assets of CN¥716b and current liabilities of CN¥268b. As a result, its current liabilities are equal to approximately 38% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Fosun International's ROCE is concerning.

Our Take On Fosun International's ROCE

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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.