Yahoo Finance Are Precision Tsugami (China) Corporation Limited’s (HKG:1651) High Returns Really That Great?
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today we'll look at Precision Tsugami (China) Corporation Limited (HKG:1651) 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 of all, we'll work out how to 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. 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.'
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 Precision Tsugami (China):
0.33 = CN¥470m ÷ (CN¥2.0b - CN¥546m) (Based on the trailing twelve months to March 2019.)
So, Precision Tsugami (China) has an ROCE of 33%.
Check out our latest analysis for Precision Tsugami (China)
Is Precision Tsugami (China)'s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Precision Tsugami (China)'s ROCE appears to be substantially greater than the 10% average in the Machinery industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Precision Tsugami (China)'s ROCE currently appears to be excellent.
In our analysis, Precision Tsugami (China)'s ROCE appears to be 33%, compared to 3 years ago, when its ROCE was 18%. This makes us wonder if the company is improving. The image below shows how Precision Tsugami (China)'s ROCE compares to its industry, and you can click it to see more detail on its past growth.
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, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Precision Tsugami (China)'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 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.
Precision Tsugami (China) has total liabilities of CN¥546m and total assets of CN¥2.0b. Therefore its current liabilities are equivalent to approximately 28% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.
The Bottom Line On Precision Tsugami (China)'s ROCE
This is good to see, and with such a high ROCE, Precision Tsugami (China) may be worth a closer look. Precision Tsugami (China) 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.
I will like Precision Tsugami (China) better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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. Thank you for reading.