Today we'll evaluate Jardine Cycle & Carriage Limited (SGX:C07) to determine whether it could have potential as an investment idea. 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. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting 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. All else being equal, a better business will have a higher ROCE. 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.'
How Do You Calculate Return On Capital Employed?
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 Jardine Cycle & Carriage:
0.10 = US$1.9b ÷ (US$29b - US$10.0b) (Based on the trailing twelve months to March 2019.)
So, Jardine Cycle & Carriage has an ROCE of 10%.
Is Jardine Cycle & Carriage's ROCE Good?
One way to assess ROCE is to compare similar companies. In our analysis, Jardine Cycle & Carriage's ROCE is meaningfully higher than the 3.5% average in the Retail Distributors industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Jardine Cycle & Carriage's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
In our analysis, Jardine Cycle & Carriage's ROCE appears to be 10%, compared to 3 years ago, when its ROCE was 7.7%. This makes us think the business might be improving. The image below shows how Jardine Cycle & Carriage'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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Jardine Cycle & Carriage.
How Jardine Cycle & Carriage's Current Liabilities Impact Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.
Jardine Cycle & Carriage has total assets of US$29b and current liabilities of US$10.0b. Therefore its current liabilities are equivalent to approximately 35% of its total assets. Jardine Cycle & Carriage has a middling amount of current liabilities, increasing its ROCE somewhat.
Our Take On Jardine Cycle & Carriage's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. There might be better investments than Jardine Cycle & Carriage out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
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.