Is Xinyi Automobile Glass Hong Kong Enterprises Limited (HKG:8328) Investing Your Capital Efficiently?

Today we'll look at Xinyi Automobile Glass Hong Kong Enterprises Limited (HKG:8328) 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. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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?

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 Xinyi Automobile Glass Hong Kong Enterprises:

0.061 = HK$24m ÷ (HK$494m - HK$92m) (Based on the trailing twelve months to December 2019.)

Therefore, Xinyi Automobile Glass Hong Kong Enterprises has an ROCE of 6.1%.

See our latest analysis for Xinyi Automobile Glass Hong Kong Enterprises

Is Xinyi Automobile Glass Hong Kong Enterprises's ROCE Good?

One way to assess ROCE is to compare similar companies. We can see Xinyi Automobile Glass Hong Kong Enterprises's ROCE is meaningfully below the Electrical industry average of 8.2%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Xinyi Automobile Glass Hong Kong Enterprises's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

We can see that, Xinyi Automobile Glass Hong Kong Enterprises currently has an ROCE of 6.1% compared to its ROCE 3 years ago, which was 1.0%. This makes us wonder if the company is improving. The image below shows how Xinyi Automobile Glass Hong Kong Enterprises'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, after all, simply a snap shot of a single year. How cyclical is Xinyi Automobile Glass Hong Kong Enterprises? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Xinyi Automobile Glass Hong Kong Enterprises'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 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.

Xinyi Automobile Glass Hong Kong Enterprises has total assets of HK$494m and current liabilities of HK$92m. Therefore its current liabilities are equivalent to approximately 19% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

What We Can Learn From Xinyi Automobile Glass Hong Kong Enterprises's ROCE

That said, Xinyi Automobile Glass Hong Kong Enterprises's ROCE is mediocre, there may be more attractive investments around. 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).

There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are 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.