Today we'll look at China Aviation Oil (Singapore) Corporation Ltd (SGX:G92) 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, 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.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 China Aviation Oil (Singapore):
0.033 = US$27m ÷ (US$2.7b - US$1.9b) (Based on the trailing twelve months to June 2019.)
So, China Aviation Oil (Singapore) has an ROCE of 3.3%.
Does China Aviation Oil (Singapore) Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see China Aviation Oil (Singapore)'s ROCE is meaningfully below the Oil and Gas industry average of 12%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how China Aviation Oil (Singapore) 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.
China Aviation Oil (Singapore)'s current ROCE of 3.3% is lower than 3 years ago, when the company reported a 4.5% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how China Aviation Oil (Singapore)'s past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Given the industry it operates in, China Aviation Oil (Singapore) could be considered cyclical. Since the future is so important for investors, you should check out our free report on analyst forecasts for China Aviation Oil (Singapore).
What Are Current Liabilities, And How Do They Affect China Aviation Oil (Singapore)'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
China Aviation Oil (Singapore) has total assets of US$2.7b and current liabilities of US$1.9b. Therefore its current liabilities are equivalent to approximately 70% of its total assets. Current liabilities of this level result in a meaningful boost to China Aviation Oil (Singapore)'s ROCE.
Our Take On China Aviation Oil (Singapore)'s ROCE
China Aviation Oil (Singapore)'s ROCE is also pretty low (in absolute terms), making the stock look unattractive on this analysis. You might be able to find a better investment than China Aviation Oil (Singapore). 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).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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If you spot an error that warrants correction, please contact the editor at email@example.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.