Today we'll evaluate Sing Tao News Corporation Limited (HKG:1105) 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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?
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 Sing Tao News:
0.0011 = HK$2.3m ÷ (HK$2.4b - HK$261m) (Based on the trailing twelve months to June 2019.)
Therefore, Sing Tao News has an ROCE of 0.1%.
Does Sing Tao News Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see Sing Tao News's ROCE is meaningfully below the Media industry average of 6.8%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Sing Tao News's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
We can see that, Sing Tao News currently has an ROCE of 0.1%, less than the 2.1% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how Sing Tao News's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. If Sing Tao News is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Sing Tao News's Current Liabilities And Their Impact On 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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Sing Tao News has total liabilities of HK$261m and total assets of HK$2.4b. Therefore its current liabilities are equivalent to approximately 11% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.
Our Take On Sing Tao News's ROCE
Sing Tao News has a poor ROCE, and there may be better investment prospects out there. You might be able to find a better investment than Sing Tao News. 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).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 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. Thank you for reading.