Sands China Ltd. (HKG:1928) Earns Among The Best Returns In Its Industry

Today we’ll evaluate Sands China Ltd. (HKG:1928) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. 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 Sands China:

0.23 = US$2.4b ÷ (US$12b – US$1.9b) (Based on the trailing twelve months to December 2018.)

Therefore, Sands China has an ROCE of 23%.

Check out our latest analysis for Sands China

Does Sands China Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Sands China’s ROCE is meaningfully higher than the 6.0% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, Sands China’s ROCE currently appears to be excellent.

Our data shows that Sands China currently has an ROCE of 23%, compared to its ROCE of 16% 3 years ago. This makes us wonder if the company is improving.

SEHK:1928 Past Revenue and Net Income, March 23rd 2019
SEHK:1928 Past Revenue and Net Income, March 23rd 2019

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. 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.

Sands China’s Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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.

Sands China has total assets of US$12b and current liabilities of US$1.9b. Therefore its current liabilities are equivalent to approximately 16% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.

The Bottom Line On Sands China’s ROCE

With low current liabilities and a high ROCE, Sands China could be worthy of further investigation. You might be able to find a better buy than Sands China. 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).

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.