Should Sienna Senior Living Inc.’s (TSE:SIA) Weak Investment Returns Worry You?
Today we'll evaluate Sienna Senior Living Inc. (TSE:SIA) 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. Then we'll compare its ROCE to similar companies. 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. All else being equal, a better business will have a higher ROCE. 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.
How Do You Calculate Return On Capital Employed?
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 Sienna Senior Living:
0.039 = CA$57m ÷ (CA$1.7b - CA$252m) (Based on the trailing twelve months to September 2019.)
Therefore, Sienna Senior Living has an ROCE of 3.9%.
See our latest analysis for Sienna Senior Living
Is Sienna Senior Living's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Sienna Senior Living's ROCE appears meaningfully below the 9.0% average reported by the Healthcare industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Sienna Senior Living compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.4% available in government bonds. Readers may wish to look for more rewarding investments.
You can see in the image below how Sienna Senior Living's ROCE compares to its industry. Click to see more on past growth.
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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Sienna Senior Living'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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Sienna Senior Living has current liabilities of CA$252m and total assets of CA$1.7b. Therefore its current liabilities are equivalent to approximately 15% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.
Our Take On Sienna Senior Living's ROCE
Sienna Senior Living has a poor ROCE, and there may be better investment prospects out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E 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).
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.
