Why Sino Grandness Food Industry Group Limited’s (SGX:T4B) Return On Capital Employed Is Impressive

Today we'll look at Sino Grandness Food Industry Group Limited (SGX:T4B) and reflect on its potential as an investment. 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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 Sino Grandness Food Industry Group:

0.16 = CN¥553m ÷ (CN¥4.8b - CN¥1.2b) (Based on the trailing twelve months to December 2018.)

Therefore, Sino Grandness Food Industry Group has an ROCE of 16%.

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Does Sino Grandness Food Industry Group Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Sino Grandness Food Industry Group's ROCE appears to be substantially greater than the 8.0% 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. Independently of how Sino Grandness Food Industry Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

Sino Grandness Food Industry Group's current ROCE of 16% is lower than its ROCE in the past, which was 38%, 3 years ago. Therefore we wonder if the company is facing new headwinds.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. You can check if Sino Grandness Food Industry Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Sino Grandness Food Industry Group's Current Liabilities And Their Impact On 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Sino Grandness Food Industry Group has total liabilities of CN¥1.2b and total assets of CN¥4.8b. Therefore its current liabilities are equivalent to approximately 26% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

What We Can Learn From Sino Grandness Food Industry Group's ROCE

Overall, Sino Grandness Food Industry Group has a decent ROCE and could be worthy of further research. There might be better investments than Sino Grandness Food Industry Group 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.

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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.