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Why You Should Care About Yantai North Andre Juice Company Limited’s (HKG:2218) Low Return On Capital

Today we are going to look at Yantai North Andre Juice Company Limited (HKG:2218) 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. 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 amount of pre-tax profits a company can generate from the 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?

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 Yantai North Andre Juice:

0.07 = CN¥128m ÷ (CN¥1.9b - CN¥105m) (Based on the trailing twelve months to June 2019.)

Therefore, Yantai North Andre Juice has an ROCE of 7.0%.

Check out our latest analysis for Yantai North Andre Juice

Is Yantai North Andre Juice's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Yantai North Andre Juice's ROCE appears meaningfully below the 10% average reported by the Food industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Yantai North Andre Juice stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.

You can click on the image below to see (in greater detail) how Yantai North Andre Juice's past growth compares to other companies.

SEHK:2218 Past Revenue and Net Income, February 23rd 2020
SEHK:2218 Past Revenue and Net Income, February 23rd 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Yantai North Andre Juice has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Do Yantai North Andre Juice's Current Liabilities Skew 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Yantai North Andre Juice has current liabilities of CN¥105m and total assets of CN¥1.9b. Therefore its current liabilities are equivalent to approximately 5.5% of its total assets. Yantai North Andre Juice reports few current liabilities, which have a negligible impact on its unremarkable ROCE.

Our Take On Yantai North Andre Juice's ROCE

Based on this information, Yantai North Andre Juice appears to be a mediocre business. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

I will like Yantai North Andre Juice 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 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.