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Today we are going to look at Chasen Holdings Limited (SGX:5NV) to see whether it might be an attractive investment prospect. 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.
Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting 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. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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 Chasen Holdings:
0.11 = S$9.1m ÷ (S$136m – S$52m) (Based on the trailing twelve months to March 2019.)
So, Chasen Holdings has an ROCE of 11%.
Is Chasen Holdings’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Chasen Holdings’s ROCE is meaningfully better than the 5.7% average in the Commercial Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Chasen Holdings compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Chasen Holdings has an ROCE of 11%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Chasen Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Chasen Holdings’s Current Liabilities And Their Impact On Its 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.
Chasen Holdings has total assets of S$136m and current liabilities of S$52m. Therefore its current liabilities are equivalent to approximately 38% of its total assets. Chasen Holdings has a middling amount of current liabilities, increasing its ROCE somewhat.
Our Take On Chasen Holdings’s ROCE
While its ROCE looks good, it’s worth remembering that the current liabilities are making the business look better. Chasen Holdings looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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 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.