Today we are going to look at Xiangxing International Holding Limited (HKG:1732) 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, 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.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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.

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 Xiangxing International Holding:

0.16 = CN¥20m ÷ (CN¥155m - CN¥28m) (Based on the trailing twelve months to December 2019.)

Therefore, Xiangxing International Holding has an ROCE of 16%.

See our latest analysis for Xiangxing International Holding

Does Xiangxing International Holding Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Xiangxing International Holding's ROCE is meaningfully better than the 3.3% average in the Shipping industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Xiangxing International Holding sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Xiangxing International Holding's current ROCE of 16% is lower than its ROCE in the past, which was 52%, 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how Xiangxing International Holding's ROCE compares to its industry. Click to see more on past growth.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. If Xiangxing International Holding is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.