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Today we'll evaluate Frencken Group Limited (SGX:E28) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. 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 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. 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.'
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 Frencken Group:
0.15 = S$44m ÷ (S$480m - S$184m) (Based on the trailing twelve months to March 2019.)
So, Frencken Group has an ROCE of 15%.
View our latest analysis for Frencken Group
Is Frencken Group's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Frencken Group's ROCE is meaningfully better than the 8.0% average in the Machinery industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Frencken Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Our data shows that Frencken Group currently has an ROCE of 15%, compared to its ROCE of 8.6% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Frencken Group's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is 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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Frencken Group.