In This Article:
Today we are going to look at Vicplas International Ltd (SGX:569) 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. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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’.
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 Vicplas International:
0.028 = S$1.7m ÷ (S$73m – S$13m) (Based on the trailing twelve months to July 2018.)
Therefore, Vicplas International has an ROCE of 2.8%.
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Does Vicplas International Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Vicplas International’s ROCE is meaningfully below the Medical Equipment industry average of 9.0%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Vicplas International’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
As we can see, Vicplas International currently has an ROCE of 2.8%, less than the 9.9% it reported 3 years ago. So investors might consider if it has had issues recently.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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. If Vicplas International is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.