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Why ANTA Sports Products Limited’s (HKG:2020) Return On Capital Employed Is Impressive

Today we'll look at ANTA Sports Products Limited (HKG:2020) 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.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 ANTA Sports Products:

0.27 = CN¥7.3b ÷ (CN¥35b - CN¥8.7b) (Based on the trailing twelve months to June 2019.)

So, ANTA Sports Products has an ROCE of 27%.

View our latest analysis for ANTA Sports Products

Is ANTA Sports Products's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. ANTA Sports Products's ROCE appears to be substantially greater than the 9.6% average in the Luxury industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, ANTA Sports Products's ROCE is currently very good.

You can click on the image below to see (in greater detail) how ANTA Sports Products's past growth compares to other companies.

SEHK:2020 Past Revenue and Net Income, February 22nd 2020
SEHK:2020 Past Revenue and Net Income, February 22nd 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do ANTA Sports Products's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

ANTA Sports Products has current liabilities of CN¥8.7b and total assets of CN¥35b. As a result, its current liabilities are equal to approximately 25% 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 ANTA Sports Products's ROCE

, ANTA Sports Products 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.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.