Today we are going to look at Sinofert Holdings Limited (HKG:297) 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. 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 measures the 'return' (pre-tax profit) a company generates from capital employed 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 Sinofert Holdings:
0.044 = CN¥335m ÷ (CN¥18b - CN¥10.0b) (Based on the trailing twelve months to December 2018.)
Therefore, Sinofert Holdings has an ROCE of 4.4%.
Is Sinofert Holdings's ROCE Good?
One way to assess ROCE is to compare similar companies. In this analysis, Sinofert Holdings's ROCE appears meaningfully below the 10% average reported by the Chemicals industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Sinofert Holdings 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.
Our data shows that Sinofert Holdings currently has an ROCE of 4.4%, compared to its ROCE of 1.1% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.
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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Sinofert Holdings's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Sinofert Holdings has total liabilities of CN¥10.0b and total assets of CN¥18b. Therefore its current liabilities are equivalent to approximately 57% of its total assets. Sinofert Holdings has a fairly high level of current liabilities, boosting its ROCE.
Our Take On Sinofert Holdings's ROCE
Sinofert Holdings's ROCE is also pretty low (in absolute terms), making the stock look unattractive on this analysis. Of course, you might also be able to find a better stock than Sinofert Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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 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.