07 May Airo AV Imply: Is Guangdong Yueyun Transportation Company Limited’s (HKG:3
Today we are going to look at Guangdong Yueyun Transportation Company Limited (HKG:3399) to see whether it might be an attractive investment prospect. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.
Understanding 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. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.
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 Guangdong Yueyun Transportation:
0.076 = CN¥591m ÷ (CN¥11b – CN¥3.4b) (Based on the trailing twelve months to December 2019.)
So, Guangdong Yueyun Transportation has an ROCE of 7.6%.
Does Guangdong Yueyun Transportation Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. It appears that Guangdong Yueyun Transportation’s ROCE is fairly close to the Logistics industry average of 7.5%. Aside from the industry comparison, Guangdong Yueyun Transportation’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
You can see in the image below how Guangdong Yueyun Transportation’s ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. How cyclical is Guangdong Yueyun Transportation? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Guangdong Yueyun Transportation’s Current Liabilities And Their Impact On 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Guangdong Yueyun Transportation has current liabilities of CN¥3.4b and total assets of CN¥11b. As a result, its current liabilities are equal to approximately 30% of its total assets. Guangdong Yueyun Transportation’s ROCE is improved somewhat by its moderate amount of current liabilities.
Our Take On Guangdong Yueyun Transportation’s ROCE
With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
I will like Guangdong Yueyun Transportation better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
If you spot an error that warrants correction, please contact the editor at [email protected]. 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.
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