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Why Kingsmen Creatives Ltd.’s (SGX:5MZ) Return On Capital Employed Looks Uninspiring

Simply Wall St

Today we'll look at Kingsmen Creatives Ltd. (SGX:5MZ) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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 Kingsmen Creatives:

0.055 = S$8.3m ÷ (S$281m - S$130m) (Based on the trailing twelve months to June 2019.)

So, Kingsmen Creatives has an ROCE of 5.5%.

View our latest analysis for Kingsmen Creatives

Does Kingsmen Creatives Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Kingsmen Creatives's ROCE appears meaningfully below the 12% average reported by the Professional Services industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Kingsmen Creatives's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

Kingsmen Creatives's current ROCE of 5.5% is lower than 3 years ago, when the company reported a 8.8% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Kingsmen Creatives's past growth compares to other companies.

SGX:5MZ Past Revenue and Net Income, August 15th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Kingsmen Creatives is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Do Kingsmen Creatives's Current Liabilities Skew Its 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Kingsmen Creatives has total assets of S$281m and current liabilities of S$130m. As a result, its current liabilities are equal to approximately 46% of its total assets. Kingsmen Creatives's middling level of current liabilities have the effect of boosting its ROCE a bit.

What We Can Learn From Kingsmen Creatives's ROCE

With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. Of course, you might also be able to find a better stock than Kingsmen Creatives. So you may wish to see this free collection of other companies that have grown earnings strongly.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.