In This Article:
Today we are going to look at SUTL Enterprise Limited (SGX:BHU) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting 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. In general, businesses with a higher ROCE are usually better quality. 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?
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 SUTL Enterprise:
0.037 = S$5.0m ÷ (S$126m – S$11m) (Based on the trailing twelve months to September 2018.)
So, SUTL Enterprise has an ROCE of 3.7%.
Check out our latest analysis for SUTL Enterprise
Does SUTL Enterprise Have A Good ROCE?
One way to assess ROCE is to compare similar companies. It appears that SUTL Enterprise’s ROCE is fairly close to the Hospitality industry average of 3.7%. Regardless of how SUTL Enterprise stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
SUTL Enterprise’s current ROCE of 3.7% is lower than 3 years ago, when the company reported a 6.1% ROCE. 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. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is SUTL Enterprise? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do SUTL Enterprise’s Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.