In This Article:
Today we’ll evaluate Sing Tao News Corporation Limited (HKG:1105) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
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. 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 Sing Tao News:
0.0076 = HK$30m ÷ (HK$2.5b – HK$294m) (Based on the trailing twelve months to June 2018.)
So, Sing Tao News has an ROCE of 0.8%.
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Does Sing Tao News Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Sing Tao News’s ROCE appears meaningfully below the 11% average reported by the Media industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how Sing Tao News stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
As we can see, Sing Tao News currently has an ROCE of 0.8%, less than the 4.7% it reported 3 years ago. So investors might consider if it has had issues recently.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Sing Tao News is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.