Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today we'll evaluate GYP Properties Limited (SGX:AWS) 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. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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 GYP Properties:
0.02 = S$3.4m ÷ (S$189m - S$22m) (Based on the trailing twelve months to March 2019.)
Therefore, GYP Properties has an ROCE of 2.0%.
View our latest analysis for GYP Properties
Is GYP Properties's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, GYP Properties's ROCE appears to be significantly below the 10% average in the Consumer Retailing industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how GYP Properties compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.3% available in government bonds. It is likely that there are more attractive prospects out there.
GYP Properties's current ROCE of 2.0% is lower than 3 years ago, when the company reported a 5.1% ROCE. Therefore we wonder if the company is facing new headwinds.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if GYP Properties has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.