Should You Like Sheng Siong Group Ltd’s (SGX:OV8) High Return On Capital Employed?
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Today we are going to look at Sheng Siong Group Ltd (SGX:OV8) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared 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. 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'.
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 Sheng Siong Group:
0.25 = S$86m ÷ (S$475m - S$133m) (Based on the trailing twelve months to March 2019.)
So, Sheng Siong Group has an ROCE of 25%.
View our latest analysis for Sheng Siong Group
Does Sheng Siong Group Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Sheng Siong Group's ROCE appears to be substantially greater than the 9.6% average in the Consumer Retailing industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Putting aside its position relative to its industry for now, in absolute terms, Sheng Siong Group's ROCE is currently very good.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Sheng Siong Group.
Sheng Siong Group'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 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Sheng Siong Group has total assets of S$475m and current liabilities of S$133m. As a result, its current liabilities are equal to approximately 28% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
What We Can Learn From Sheng Siong Group's ROCE
This is good to see, and with such a high ROCE, Sheng Siong Group may be worth a closer look. Sheng Siong Group shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
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.
