Today we'll evaluate Wynn Macau, Limited (HKG:1128) to determine whether it could have potential as an investment idea. 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. 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 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. 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?
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 Wynn Macau:
0.21 = US$863m ÷ (US$5.4b - US$1.3b) (Based on the trailing twelve months to September 2019.)
So, Wynn Macau has an ROCE of 21%.
Does Wynn Macau Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Wynn Macau's ROCE is meaningfully better than the 5.4% average in the Hospitality 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. Regardless of the industry comparison, in absolute terms, Wynn Macau's ROCE currently appears to be excellent.
Our data shows that Wynn Macau currently has an ROCE of 21%, compared to its ROCE of 6.3% 3 years ago. This makes us wonder if the company is improving. The image below shows how Wynn Macau's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Wynn Macau.
How Wynn Macau's Current Liabilities Impact 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Wynn Macau has total liabilities of US$1.3b and total assets of US$5.4b. As a result, its current liabilities are equal to approximately 25% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.
Our Take On Wynn Macau's ROCE
This is good to see, and with such a high ROCE, Wynn Macau may be worth a closer look. Wynn Macau looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
I will like Wynn Macau better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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