What Can We Make Of Yangzijiang Shipbuilding (Holdings) Ltd.’s (SGX:BS6) High Return On Capital?

Simply Wall St

Today we'll look at Yangzijiang Shipbuilding (Holdings) Ltd. (SGX:BS6) 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, 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.

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.

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 Yangzijiang Shipbuilding (Holdings):

0.11 = CN¥3.8b ÷ (CN¥46b - CN¥10b) (Based on the trailing twelve months to December 2019.)

So, Yangzijiang Shipbuilding (Holdings) has an ROCE of 11%.

See our latest analysis for Yangzijiang Shipbuilding (Holdings)

Does Yangzijiang Shipbuilding (Holdings) Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Yangzijiang Shipbuilding (Holdings)'s ROCE is meaningfully better than the 6.2% average in the Machinery industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Yangzijiang Shipbuilding (Holdings)'s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

You can click on the image below to see (in greater detail) how Yangzijiang Shipbuilding (Holdings)'s past growth compares to other companies.

SGX:BS6 Past Revenue and Net Income March 30th 2020

It is important to remember that ROCE shows past performance, and is 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Yangzijiang Shipbuilding (Holdings).

How Yangzijiang Shipbuilding (Holdings)'s Current Liabilities Impact 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 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.

Yangzijiang Shipbuilding (Holdings) has total assets of CN¥46b and current liabilities of CN¥10b. Therefore its current liabilities are equivalent to approximately 22% of its total assets. Low current liabilities are not boosting the ROCE too much.

The Bottom Line On Yangzijiang Shipbuilding (Holdings)'s ROCE

This is good to see, and with a sound ROCE, Yangzijiang Shipbuilding (Holdings) could be worth a closer look. Yangzijiang Shipbuilding (Holdings) 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.

Yangzijiang Shipbuilding (Holdings) is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.

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.