Are Sinostar PEC Holdings Limited’s Returns On Capital Worth Investigating?
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Today we’ll evaluate Sinostar PEC Holdings Limited (SGX:C9Q) to determine whether it could have potential as an investment idea. 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 up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
Understanding 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. 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?
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 Sinostar PEC Holdings:
0.15 = CN¥82m ÷ (CN¥770m – CN¥51m) (Based on the trailing twelve months to September 2018.)
Therefore, Sinostar PEC Holdings has an ROCE of 15%.
See our latest analysis for Sinostar PEC Holdings
Is Sinostar PEC Holdings’s ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Sinostar PEC Holdings’s ROCE is around the 14% average reported by the Oil and Gas industry. Separate from Sinostar PEC Holdings’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
As we can see, Sinostar PEC Holdings currently has an ROCE of 15% compared to its ROCE 3 years ago, which was 7.6%. This makes us think about whether the company has been reinvesting shrewdly.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. Remember that most companies like Sinostar PEC Holdings are cyclical businesses. If Sinostar PEC Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Sinostar PEC Holdings’s Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Sinostar PEC Holdings has total liabilities of CN¥51m and total assets of CN¥770m. Therefore its current liabilities are equivalent to approximately 6.6% of its total assets. Low current liabilities have only a minimal impact on Sinostar PEC Holdings’s ROCE, making its decent returns more credible.
The Bottom Line On Sinostar PEC Holdings’s ROCE
If it is able to keep this up, Sinostar PEC Holdings could be attractive. 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.
I will like Sinostar PEC Holdings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.
