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Are Tai Sin Electric Limited’s (SGX:500) Returns Worth Your While?

Simply Wall St

Today we'll evaluate Tai Sin Electric Limited (SGX:500) 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. 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. In general, businesses with a higher ROCE are usually better quality. 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 Tai Sin Electric:

0.074 = S$13m ÷ (S$237m - S$58m) (Based on the trailing twelve months to June 2019.)

Therefore, Tai Sin Electric has an ROCE of 7.4%.

See our latest analysis for Tai Sin Electric

Does Tai Sin Electric Have A Good ROCE?

One way to assess ROCE is to compare similar companies. It appears that Tai Sin Electric's ROCE is fairly close to the Electrical industry average of 8.1%. Separate from how Tai Sin Electric stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.

Tai Sin Electric's current ROCE of 7.4% is lower than its ROCE in the past, which was 17%, 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how Tai Sin Electric's ROCE compares to its industry. Click to see more on past growth.

SGX:500 Past Revenue and Net Income, October 29th 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. You can check if Tai Sin Electric has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How Tai Sin Electric's Current Liabilities Impact 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.

Tai Sin Electric has total liabilities of S$58m and total assets of S$237m. As a result, its current liabilities are equal to approximately 24% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

What We Can Learn From Tai Sin Electric's ROCE

That said, Tai Sin Electric's ROCE is mediocre, there may be more attractive investments around. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

There are plenty of other companies that have insiders buying up shares. You probably do 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.