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Is Sin Ghee Huat Corporation Ltd. (SGX:B7K) Investing Your Capital Efficiently?

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Today we’ll evaluate Sin Ghee Huat Corporation Ltd. (SGX:B7K) to determine whether it could have potential as an investment idea. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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 Sin Ghee Huat:

0.025 = S$223k ÷ (S$89m – S$4.2m) (Based on the trailing twelve months to December 2018.)

So, Sin Ghee Huat has an ROCE of 2.5%.

View our latest analysis for Sin Ghee Huat

Is Sin Ghee Huat’s ROCE Good?

One way to assess ROCE is to compare similar companies. We can see Sin Ghee Huat’s ROCE is meaningfully below the Trade Distributors industry average of 3.8%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Sin Ghee Huat compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.3% available in government bonds. There are potentially more appealing investments elsewhere.

SGX:B7K Past Revenue and Net Income, February 25th 2019
SGX:B7K Past Revenue and Net Income, February 25th 2019

When considering this metric, keep in mind that it is backwards looking, and 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. How cyclical is Sin Ghee Huat? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Sin Ghee Huat’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 counter this, investors can check if a company has high current liabilities relative to total assets.

Sin Ghee Huat has total assets of S$89m and current liabilities of S$4.2m. As a result, its current liabilities are equal to approximately 4.7% of its total assets. Sin Ghee Huat has very few current liabilities, which have a minimal effect on its already low ROCE.

The Bottom Line On Sin Ghee Huat’s ROCE

Nevertheless, there are potentially more attractive companies to invest in. You might be able to find a better buy than Sin Ghee Huat. 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).

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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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