What Can We Make Of Brook Crompton Holdings Ltd.’s (SGX:AWC) High Return On Capital?
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Today we are going to look at Brook Crompton Holdings Ltd. (SGX:AWC) to see whether it might be an attractive investment prospect. 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. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. Generally speaking a higher ROCE is better. 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'.
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 Brook Crompton Holdings:
0.12 = S$3.8m ÷ (S$43m - S$11m) (Based on the trailing twelve months to December 2018.)
So, Brook Crompton Holdings has an ROCE of 12%.
See our latest analysis for Brook Crompton Holdings
Does Brook Crompton Holdings Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Brook Crompton Holdings's ROCE appears to be substantially greater than the 2.1% average in the Trade Distributors 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. Regardless of where Brook Crompton Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. How cyclical is Brook Crompton Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Brook Crompton Holdings's Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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.
Brook Crompton Holdings has total assets of S$43m and current liabilities of S$11m. As a result, its current liabilities are equal to approximately 26% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
The Bottom Line On Brook Crompton Holdings's ROCE
This is good to see, and with a sound ROCE, Brook Crompton Holdings could be worth a closer look. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
