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Are SITC International Holdings Company Limited’s (HKG:1308) High Returns Really That Great?

Simply Wall St

Today we are going to look at SITC International Holdings Company Limited (HKG:1308) 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.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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'.

So, How Do We Calculate ROCE?

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 SITC International Holdings:

0.14 = US$200m ÷ (US$1.8b - US$365m) (Based on the trailing twelve months to June 2019.)

So, SITC International Holdings has an ROCE of 14%.

See our latest analysis for SITC International Holdings

Is SITC International Holdings's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In our analysis, SITC International Holdings's ROCE is meaningfully higher than the 3.2% average in the Shipping 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. Regardless of where SITC International Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

We can see that, SITC International Holdings currently has an ROCE of 14% compared to its ROCE 3 years ago, which was 10%. This makes us think the business might be improving. You can see in the image below how SITC International Holdings's ROCE compares to its industry. Click to see more on past growth.

SEHK:1308 Past Revenue and Net Income, January 20th 2020

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect SITC International Holdings's ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.

SITC International Holdings has total liabilities of US$365m and total assets of US$1.8b. As a result, its current liabilities are equal to approximately 20% of its total assets. Low current liabilities are not boosting the ROCE too much.

Our Take On SITC International Holdings's ROCE

Overall, SITC International Holdings has a decent ROCE and could be worthy of further research. SITC International Holdings looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

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.