Today we'll look at Grand Banks Yachts Limited (SGX:G50) and reflect on its potential as an investment. 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
How Do You Calculate Return On Capital Employed?
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 Grand Banks Yachts:
0.047 = S$3.2m ÷ (S$94m - S$27m) (Based on the trailing twelve months to September 2019.)
So, Grand Banks Yachts has an ROCE of 4.7%.
Is Grand Banks Yachts's ROCE Good?
One way to assess ROCE is to compare similar companies. In this analysis, Grand Banks Yachts's ROCE appears meaningfully below the 8.1% average reported by the Machinery industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how Grand Banks Yachts stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
Grand Banks Yachts delivered an ROCE of 4.7%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. The image below shows how Grand Banks Yachts's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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 Grand Banks Yachts has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Grand Banks Yachts's ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Grand Banks Yachts has total liabilities of S$27m and total assets of S$94m. Therefore its current liabilities are equivalent to approximately 29% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
What We Can Learn From Grand Banks Yachts's ROCE
While that is good to see, Grand Banks Yachts has a low ROCE and does not look attractive in this analysis. You might be able to find a better investment than Grand Banks Yachts. 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.