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Qian Hu Corporation Limited (SGX:BCV) Might Not Be A Great Investment

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Today we are going to look at Qian Hu Corporation Limited (SGX:BCV) 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

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. 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 Qian Hu:

0.022 = S$1.1m ÷ (S$80m - S$28m) (Based on the trailing twelve months to March 2019.)

Therefore, Qian Hu has an ROCE of 2.2%.

See our latest analysis for Qian Hu

Does Qian Hu Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Qian Hu's ROCE appears to be significantly below the 7.4% average in the Leisure industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Qian Hu compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.3% available in government bonds. Readers may wish to look for more rewarding investments.

Our data shows that Qian Hu currently has an ROCE of 2.2%, compared to its ROCE of 1.2% 3 years ago. This makes us think the business might be improving.

SGX:BCV Past Revenue and Net Income, June 25th 2019
SGX:BCV Past Revenue and Net Income, June 25th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. If Qian Hu is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Do Qian Hu's Current Liabilities Skew Its ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Qian Hu has total liabilities of S$28m and total assets of S$80m. As a result, its current liabilities are equal to approximately 35% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Qian Hu's ROCE is concerning.

The Bottom Line On Qian Hu's ROCE

So researching other companies may be a better use of your time. 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).

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.

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