Yahoo Finance Ausnutria Dairy Corporation Ltd (HKG:1717) Earns Among The Best Returns In Its Industry
Today we are going to look at Ausnutria Dairy Corporation Ltd (HKG:1717) 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.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. 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.
So, How Do We Calculate ROCE?
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 Ausnutria Dairy:
0.25 = CN¥1.1b ÷ (CN¥7.5b - CN¥3.0b) (Based on the trailing twelve months to September 2019.)
Therefore, Ausnutria Dairy has an ROCE of 25%.
Check out our latest analysis for Ausnutria Dairy
Is Ausnutria Dairy's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Ausnutria Dairy's ROCE is meaningfully higher than the 10% average in the Food industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Ausnutria Dairy's ROCE in absolute terms currently looks quite high.
In our analysis, Ausnutria Dairy's ROCE appears to be 25%, compared to 3 years ago, when its ROCE was 5.8%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Ausnutria Dairy's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Ausnutria Dairy'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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Ausnutria Dairy has total assets of CN¥7.5b and current liabilities of CN¥3.0b. As a result, its current liabilities are equal to approximately 40% of its total assets. Ausnutria Dairy's ROCE is boosted somewhat by its middling amount of current liabilities.
The Bottom Line On Ausnutria Dairy's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Ausnutria Dairy shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
I will like Ausnutria Dairy 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.
