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Today we are going to look at Sing Lee Software (Group) Limited (HKG:8076) to see whether it might be an attractive investment prospect. 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.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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'.
So, How Do We Calculate ROCE?
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 Sing Lee Software (Group):
0.32 = CN¥32m ÷ (CN¥153m - CN¥50m) (Based on the trailing twelve months to March 2019.)
Therefore, Sing Lee Software (Group) has an ROCE of 32%.
See our latest analysis for Sing Lee Software (Group)
Is Sing Lee Software (Group)'s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Sing Lee Software (Group)'s ROCE is meaningfully better than the 9.1% average in the Software industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Sing Lee Software (Group)'s ROCE in absolute terms currently looks quite high.
Our data shows that Sing Lee Software (Group) currently has an ROCE of 32%, compared to its ROCE of 16% 3 years ago. This makes us think the business might be improving.
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. ROCE is only a point-in-time measure. How cyclical is Sing Lee Software (Group)? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.