In This Article:
Today we are going to look at Sunright Limited (SGX:S71) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
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.
What is 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. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
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 Sunright:
0.028 = S$4.4m ÷ (S$192m - S$36m) (Based on the trailing twelve months to April 2019.)
Therefore, Sunright has an ROCE of 2.8%.
Check out our latest analysis for Sunright
Does Sunright Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Sunright's ROCE appears to be significantly below the 4.8% average in the Semiconductor industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Sunright'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.
Sunright's current ROCE of 2.8% is lower than its ROCE in the past, which was 8.7%, 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Sunright's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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, after all, simply a snap shot of a single year. How cyclical is Sunright? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.