Geely Automobile Holdings Limited (HKG:175) Is Employing Capital Very Effectively
Today we are going to look at Geely Automobile Holdings Limited (HKG:175) to see whether it might be an attractive investment prospect. 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
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. In brief, it is a useful tool, but it is not without drawbacks. 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 Geely Automobile Holdings:
0.20 = CN¥10b ÷ (CN¥92b - CN¥42b) (Based on the trailing twelve months to June 2019.)
Therefore, Geely Automobile Holdings has an ROCE of 20%.
View our latest analysis for Geely Automobile Holdings
Is Geely Automobile Holdings's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Geely Automobile Holdings's ROCE is meaningfully better than the 6.4% average in the Auto 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. Putting aside its position relative to its industry for now, in absolute terms, Geely Automobile Holdings's ROCE is currently very good.
We can see that, Geely Automobile Holdings currently has an ROCE of 20% compared to its ROCE 3 years ago, which was 9.6%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Geely Automobile Holdings's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Geely Automobile Holdings.
What Are Current Liabilities, And How Do They Affect Geely Automobile Holdings's 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.
Geely Automobile Holdings has current liabilities of CN¥42b and total assets of CN¥92b. As a result, its current liabilities are equal to approximately 46% of its total assets. Geely Automobile Holdings's ROCE is boosted somewhat by its middling amount of current liabilities.
Our Take On Geely Automobile Holdings's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Geely Automobile Holdings 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.
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.
