Yahoo Finance China Mobile Limited (HKG:941) Earns Among The Best Returns In Its Industry
Today we are going to look at China Mobile Limited (HKG:941) 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. 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.
What is 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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 China Mobile:
0.12 = CN¥123b ÷ (CN¥1.5t - CN¥474b) (Based on the trailing twelve months to December 2018.)
Therefore, China Mobile has an ROCE of 12%.
Check out our latest analysis for China Mobile
Does China Mobile Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, we find that China Mobile's ROCE is meaningfully better than the 7.1% average in the Wireless Telecom industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how China Mobile compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
It is important to remember that ROCE shows past performance, and is 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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for China Mobile.
How China Mobile's Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
China Mobile has total assets of CN¥1.5t and current liabilities of CN¥474b. As a result, its current liabilities are equal to approximately 31% of its total assets. China Mobile has a middling amount of current liabilities, increasing its ROCE somewhat.
The Bottom Line On China Mobile's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. China Mobile 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.
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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.
