In This Article:
Today we'll look at Singamas Container Holdings Limited (HKG:716) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. 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.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from 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 Singamas Container Holdings:
0.20 = US$182m ÷ (US$1.4b - US$481m) (Based on the trailing twelve months to December 2018.)
Therefore, Singamas Container Holdings has an ROCE of 20%.
See our latest analysis for Singamas Container Holdings
Is Singamas Container Holdings's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Singamas Container Holdings's ROCE is meaningfully better than the 11% 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. Regardless of where Singamas Container Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that , Singamas Container Holdings currently has an ROCE of 20% compared to its ROCE 3 years ago, which was 15%. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Singamas Container Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Singamas Container Holdings.