Today we’ll look at Thai Beverage Public Company Limited (SGX:Y92) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared 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 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. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 Thai Beverage:
0.072 = ฿26b ÷ (฿401b – ฿37b) (Based on the trailing twelve months to September 2018.)
Therefore, Thai Beverage has an ROCE of 7.2%.
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Is Thai Beverage’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Thai Beverage’s ROCE appears meaningfully below the 9.7% average reported by the Beverage industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Setting aside the industry comparison for now, Thai Beverage’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
Thai Beverage’s current ROCE of 7.2% is lower than its ROCE in the past, which was 16%, 3 years ago. So investors might consider if it has had issues recently.
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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Thai Beverage.
What Are Current Liabilities, And How Do They Affect Thai Beverage’s ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Thai Beverage has total liabilities of ฿37b and total assets of ฿401b. Therefore its current liabilities are equivalent to approximately 9.3% of its total assets. Thai Beverage reports few current liabilities, which have a negligible impact on its unremarkable ROCE.
Our Take On Thai Beverage’s ROCE
Based on this information, Thai Beverage appears to be a mediocre business. Of course you might be able to find a better stock than Thai Beverage. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.