In This Article:
Today we’ll look at SIIC Environment Holdings Ltd. (SGX:BHK) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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’.
How Do You Calculate Return On Capital Employed?
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 SIIC Environment Holdings:
0.049 = CN¥1.1b ÷ (CN¥30b – CN¥8.0b) (Based on the trailing twelve months to December 2018.)
Therefore, SIIC Environment Holdings has an ROCE of 4.9%.
See our latest analysis for SIIC Environment Holdings
Does SIIC Environment Holdings Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see SIIC Environment Holdings’s ROCE is meaningfully below the Water Utilities industry average of 7.6%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how SIIC Environment Holdings stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
When considering this metric, keep in mind that it is backwards looking, and 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 SIIC Environment Holdings.
How SIIC Environment Holdings’s Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.