Today we’ll look at Sigdo Koppers S.A. (SNSE:SK) and reflect on its potential as an investment. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect 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. Overall, it is a valuable metric that has its flaws. 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 Sigdo Koppers:
0.086 = US$247m ÷ (US$3.8b – US$922m) (Based on the trailing twelve months to September 2019.)
So, Sigdo Koppers has an ROCE of 8.6%.
Is Sigdo Koppers’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Sigdo Koppers’s ROCE is meaningfully better than the 5.1% average in the Industrials industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside Sigdo Koppers’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
Our data shows that Sigdo Koppers currently has an ROCE of 8.6%, compared to its ROCE of 6.7% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Sigdo Koppers’s past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Sigdo Koppers? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Sigdo Koppers’s Current Liabilities And Their Impact On 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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Sigdo Koppers has total assets of US$3.8b and current liabilities of US$922m. As a result, its current liabilities are equal to approximately 24% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
Our Take On Sigdo Koppers’s ROCE
That’s not a bad thing, however Sigdo Koppers has a weak ROCE and may not be an attractive investment. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
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. Thank you for reading.