Why You Should Like Ocean Line Port Development Limited’s (HKG:8502) ROCE
Today we'll look at Ocean Line Port Development Limited (HKG:8502) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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'.
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 Ocean Line Port Development:
0.12 = CN¥60m ÷ (CN¥616m - CN¥135m) (Based on the trailing twelve months to December 2019.)
Therefore, Ocean Line Port Development has an ROCE of 12%.
See our latest analysis for Ocean Line Port Development
Does Ocean Line Port Development Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Ocean Line Port Development's ROCE appears to be substantially greater than the 7.6% average in the Infrastructure industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Ocean Line Port Development sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
In our analysis, Ocean Line Port Development's ROCE appears to be 12%, compared to 3 years ago, when its ROCE was 2.0%. This makes us wonder if the company is improving. The image below shows how Ocean Line Port Development's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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 only a point-in-time measure. How cyclical is Ocean Line Port Development? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Ocean Line Port Development's Current Liabilities Skew Its ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Ocean Line Port Development has current liabilities of CN¥135m and total assets of CN¥616m. As a result, its current liabilities are equal to approximately 22% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
Our Take On Ocean Line Port Development's ROCE
This is good to see, and with a sound ROCE, Ocean Line Port Development could be worth a closer look. Ocean Line Port Development looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
