Is KSH Holdings Limited’s (SGX:ER0) Return On Capital Employed Any Good?

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Today we’ll evaluate KSH Holdings Limited (SGX:ER0) 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 up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on 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. In general, businesses with a higher ROCE are usually better quality. 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.’

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 KSH Holdings:

0.06 = S$27m ÷ (S$619m – S$163m) (Based on the trailing twelve months to December 2018.)

So, KSH Holdings has an ROCE of 6.0%.

See our latest analysis for KSH Holdings

Does KSH Holdings Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, KSH Holdings’s ROCE appears to be around the 5.6% average of the Construction industry. Separate from how KSH Holdings stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.

SGX:ER0 Past Revenue and Net Income, May 6th 2019
SGX:ER0 Past Revenue and Net Income, May 6th 2019

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. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

What Are Current Liabilities, And How Do They Affect KSH Holdings’s ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

KSH Holdings has total assets of S$619m and current liabilities of S$163m. Therefore its current liabilities are equivalent to approximately 26% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

Our Take On KSH Holdings’s ROCE

With that in mind, we’re not overly impressed with KSH Holdings’s ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than KSH Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like KSH Holdings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.