In This Article:
Today we’ll evaluate Soup Restaurant Group Limited (SGX:5KI) 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. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 Soup Restaurant Group:
0.25 = S$1.8m ÷ (S$16m – S$5.3m) (Based on the trailing twelve months to September 2018.)
Therefore, Soup Restaurant Group has an ROCE of 25%.
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Does Soup Restaurant Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Soup Restaurant Group’s ROCE appears to be substantially greater than the 3.7% average in the Hospitality 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. Putting aside its position relative to its industry for now, in absolute terms, Soup Restaurant Group’s ROCE is currently very good.
Our data shows that Soup Restaurant Group currently has an ROCE of 25%, compared to its ROCE of 2.7% 3 years ago. This makes us wonder if the company is improving.
When considering this metric, keep in mind that it is backwards looking, and 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 Soup Restaurant Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.