Today we’ll evaluate Impiana Hotels Berhad (KLSE:IMPIANA) 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.
First, 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.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the 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?
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 Impiana Hotels Berhad:
0.012 = RM6.2m ÷ (RM560m – RM47m) (Based on the trailing twelve months to December 2019.)
So, Impiana Hotels Berhad has an ROCE of 1.2%.
Is Impiana Hotels Berhad’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Impiana Hotels Berhad’s ROCE appears meaningfully below the 7.3% average reported by the Hospitality industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Impiana Hotels Berhad’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.
You can see in the image below how Impiana Hotels Berhad’s ROCE compares to its industry. Click to see more on past growth.
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 only a point-in-time measure. How cyclical is Impiana Hotels Berhad? 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 Impiana Hotels Berhad’s ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Impiana Hotels Berhad has total assets of RM560m and current liabilities of RM47m. Therefore its current liabilities are equivalent to approximately 8.3% of its total assets. With barely any current liabilities, there is minimal impact on Impiana Hotels Berhad’s admittedly low ROCE.
What We Can Learn From Impiana Hotels Berhad’s ROCE
Nevertheless, there are potentially more attractive companies to invest in. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
I will like Impiana Hotels Berhad better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.
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