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Today we’ll evaluate Want Want China Holdings Limited (

HKG:151

) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on 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. 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?

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 Want Want China Holdings:

0.19 = CN¥4.0b ÷ (CN¥28b – CN¥5.8b) (Based on the trailing twelve months to September 2018.)

Therefore,

Want Want China Holdings has an ROCE of 19%.

See our latest analysis for Want Want China Holdings

Is Want Want China Holdings’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Want Want China Holdings’s ROCE is meaningfully better than the 11% average in the Food 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. Regardless of where Want Want China Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

As we can see, Want Want China Holdings currently has an ROCE of 19%, less than the 25% it reported 3 years ago. This makes us wonder if the business is facing new challenges.

SEHK:151 Last Perf February 1st 19

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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, 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 Want Want China Holdings

.

Story continues

Want Want China Holdings’s Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

Want Want China Holdings has total assets of CN¥28b and current liabilities of CN¥5.8b. Therefore its current liabilities are equivalent to approximately 21% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

Our Take On Want Want China Holdings’s ROCE

With that in mind, Want Want China Holdings’s ROCE appears pretty good. But note:

Want Want China Holdings may not be the best stock to buy

. So take a peek at this

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To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at

[email protected]

.

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