Today we are going to look at TS Wonders Holding Limited (HKG:1767) 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. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. 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 TS Wonders Holding:
0.084 = S$4.6m ÷ (S$60m - S$4.2m) (Based on the trailing twelve months to June 2019.)
So, TS Wonders Holding has an ROCE of 8.4%.
Is TS Wonders Holding's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see TS Wonders Holding's ROCE is around the 10% average reported by the Food industry. Setting aside the industry comparison for now, TS Wonders Holding's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
TS Wonders Holding's current ROCE of 8.4% is lower than 3 years ago, when the company reported a 19% 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 TS Wonders Holding's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. How cyclical is TS Wonders Holding? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How TS Wonders Holding'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 the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
TS Wonders Holding has total assets of S$60m and current liabilities of S$4.2m. As a result, its current liabilities are equal to approximately 7.0% of its total assets. TS Wonders Holding reports few current liabilities, which have a negligible impact on its unremarkable ROCE.
The Bottom Line On TS Wonders Holding's ROCE
If performance improves, then TS Wonders Holding may be an OK investment, especially at the right valuation. You might be able to find a better investment than TS Wonders Holding. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
If you spot an error that warrants correction, please contact the editor at email@example.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.
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