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How Do Golden Agri-Resources Ltd’s (SGX:E5H) Returns Compare To Its Industry?

Simply Wall St

Today we are going to look at Golden Agri-Resources Ltd (SGX:E5H) 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.

First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its 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. 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 Golden Agri-Resources:

0.012 = US$73m ÷ (US$8.5b - US$2.6b) (Based on the trailing twelve months to September 2019.)

Therefore, Golden Agri-Resources has an ROCE of 1.2%.

View our latest analysis for Golden Agri-Resources

Is Golden Agri-Resources's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Golden Agri-Resources's ROCE is meaningfully below the Food industry average of 7.5%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Golden Agri-Resources compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.8% available in government bonds. Readers may wish to look for more rewarding investments.

Golden Agri-Resources's current ROCE of 1.2% is lower than its ROCE in the past, which was 3.1%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Golden Agri-Resources's past growth compares to other companies.

SGX:E5H Past Revenue and Net Income, January 20th 2020

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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do Golden Agri-Resources's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Golden Agri-Resources has total liabilities of US$2.6b and total assets of US$8.5b. As a result, its current liabilities are equal to approximately 31% of its total assets. With a medium level of current liabilities boosting the ROCE a little, Golden Agri-Resources's low ROCE is unappealing.

The Bottom Line On Golden Agri-Resources's ROCE

So researching other companies may be a better use of your time. You might be able to find a better investment than Golden Agri-Resources. 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 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.

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.