Today we are going to look at Nam Lee Pressed Metal Industries Limited (SGX:G0I) 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. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
So, How Do We Calculate ROCE?
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 Nam Lee Pressed Metal Industries:
0.099 = S$14m ÷ (S$165m - S$23m) (Based on the trailing twelve months to June 2019.)
So, Nam Lee Pressed Metal Industries has an ROCE of 9.9%.
Does Nam Lee Pressed Metal Industries Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, Nam Lee Pressed Metal Industries's ROCE appears to be around the 12% average of the Building industry. Aside from the industry comparison, Nam Lee Pressed Metal Industries's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
You can see in the image below how Nam Lee Pressed Metal Industries's ROCE compares to its industry. Click to see more on 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Nam Lee Pressed Metal Industries is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do Nam Lee Pressed Metal Industries's Current Liabilities Skew Its ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Nam Lee Pressed Metal Industries has total assets of S$165m and current liabilities of S$23m. Therefore its current liabilities are equivalent to approximately 14% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.
What We Can Learn From Nam Lee Pressed Metal Industries's ROCE
With that in mind, we're not overly impressed with Nam Lee Pressed Metal Industries's ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than Nam Lee Pressed Metal Industries. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Nam Lee Pressed Metal Industries better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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 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. Thank you for reading.