Today we are going to look at Sino Grandness Food Industry Group Limited (SGX:T4B) to see whether it might be an attractive investment prospect. 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. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the 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. 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'.
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 Sino Grandness Food Industry Group:
0.091 = CN¥322m ÷ (CN¥5.0b - CN¥1.4b) (Based on the trailing twelve months to September 2019.)
Therefore, Sino Grandness Food Industry Group has an ROCE of 9.1%.
Does Sino Grandness Food Industry Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Sino Grandness Food Industry Group's ROCE is meaningfully higher than the 7.5% average in the Food industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Aside from the industry comparison, Sino Grandness Food Industry Group's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Sino Grandness Food Industry Group's current ROCE of 9.1% is lower than 3 years ago, when the company reported a 30% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Sino Grandness Food Industry Group's past growth compares to other companies.
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 Sino Grandness Food Industry Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do Sino Grandness Food Industry Group's Current Liabilities Skew Its 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 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.
Sino Grandness Food Industry Group has total assets of CN¥5.0b and current liabilities of CN¥1.4b. As a result, its current liabilities are equal to approximately 29% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.
Our Take On Sino Grandness Food Industry Group's ROCE
With that in mind, we're not overly impressed with Sino Grandness Food Industry Group's ROCE, so it may not be the most appealing prospect. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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