Here’s What Nordic Group Limited’s (SGX:MR7) ROCE Can Tell Us
Today we’ll evaluate Nordic Group Limited (SGX:MR7) to determine whether it could have potential as an investment idea. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting 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. 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?
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 Nordic Group:
0.11 = S$10m ÷ (S$152m – S$58m) (Based on the trailing twelve months to December 2018.)
Therefore, Nordic Group has an ROCE of 11%.
See our latest analysis for Nordic Group
Is Nordic Group’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Nordic Group’s ROCE is meaningfully better than the 5.6% average in the Construction industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Nordic Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Nordic Group’s current ROCE of 11% is lower than 3 years ago, when the company reported a 15% ROCE. Therefore we wonder if the company is facing new headwinds.
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. ROCE is only a point-in-time measure. You can check if Nordic Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Nordic Group’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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Nordic Group has total assets of S$152m and current liabilities of S$58m. Therefore its current liabilities are equivalent to approximately 38% of its total assets. With this level of current liabilities, Nordic Group’s ROCE is boosted somewhat.
The Bottom Line On Nordic Group’s ROCE
While its ROCE looks good, it’s worth remembering that the current liabilities are making the business look better. But note: Nordic Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio 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.
