Today we are going to look at Grand Banks Yachts Limited (SGX:G50) 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, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.
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 Grand Banks Yachts:
0.056 = S$3.6m ÷ (S$98m – S$34m) (Based on the trailing twelve months to December 2019.)
So, Grand Banks Yachts has an ROCE of 5.6%.
Does Grand Banks Yachts Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Grand Banks Yachts’s ROCE is fairly close to the Machinery industry average of 6.2%. Aside from the industry comparison, Grand Banks Yachts’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.
Grand Banks Yachts delivered an ROCE of 5.6%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving. The image below shows how Grand Banks Yachts’s ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Grand Banks Yachts is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Grand Banks Yachts’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 the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
Grand Banks Yachts has total assets of S$98m and current liabilities of S$34m. As a result, its current liabilities are equal to approximately 35% of its total assets. Grand Banks Yachts has a medium level of current liabilities, which would boost its ROCE somewhat.
Our Take On Grand Banks Yachts’s ROCE
Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. You might be able to find a better investment than Grand Banks Yachts. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
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