Today we are going to look at APT Satellite Holdings Limited (HKG:1045) 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. Then we'll compare its ROCE to similar companies. 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 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. 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?
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 APT Satellite Holdings:
0.082 = HK$547m ÷ (HK$6.9b - HK$218m) (Based on the trailing twelve months to June 2019.)
So, APT Satellite Holdings has an ROCE of 8.2%.
Does APT Satellite Holdings Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that APT Satellite Holdings's ROCE is meaningfully better than the 6.7% average in the Telecom industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the industry comparison for now, APT Satellite Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
APT Satellite Holdings's current ROCE of 8.2% is lower than 3 years ago, when the company reported a 11% ROCE. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how APT Satellite Holdings's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 APT Satellite Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do APT Satellite Holdings's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
APT Satellite Holdings has total assets of HK$6.9b and current liabilities of HK$218m. Therefore its current liabilities are equivalent to approximately 3.2% of its total assets. APT Satellite Holdings has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.
What We Can Learn From APT Satellite Holdings's ROCE
Based on this information, APT Satellite Holdings appears to be a mediocre business. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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. Thank you for reading.