Today we’ll evaluate Asia Satellite Telecommunications Holdings Limited (HKG:1135) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
What is 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. Overall, it is a valuable metric that has its flaws. 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’.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Asia Satellite Telecommunications Holdings:
0.10 = HK$654m ÷ (HK$7.2b – HK$670m) (Based on the trailing twelve months to December 2018.)
So, Asia Satellite Telecommunications Holdings has an ROCE of 10.0%.
Does Asia Satellite Telecommunications Holdings Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Asia Satellite Telecommunications Holdings’s ROCE is around the 9.1% average reported by the Telecom industry. Aside from the industry comparison, Asia Satellite Telecommunications Holdings’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. How cyclical is Asia Satellite Telecommunications Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Asia Satellite Telecommunications Holdings’s 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Asia Satellite Telecommunications Holdings has total assets of HK$7.2b and current liabilities of HK$670m. Therefore its current liabilities are equivalent to approximately 9.3% of its total assets. With low levels of current liabilities, at least Asia Satellite Telecommunications Holdings’s mediocre ROCE is not unduly boosted.
Our Take On Asia Satellite Telecommunications Holdings’s ROCE
If performance improves, then Asia Satellite Telecommunications Holdings may be an OK investment, especially at the right valuation. Of course you might be able to find a better stock than Asia Satellite Telecommunications Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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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.