Why You Should Like Sheng Siong Group Ltd’s (SGX:OV8) ROCE

Today we’ll evaluate Sheng Siong Group Ltd (SGX:OV8) to determine whether it could have potential as an investment idea. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed 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. 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 Sheng Siong Group:

0.28 = S$84m ÷ (S$436m – S$141m) (Based on the trailing twelve months to December 2018.)

So, Sheng Siong Group has an ROCE of 28%.

See our latest analysis for Sheng Siong Group

Is Sheng Siong Group’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Sheng Siong Group’s ROCE is meaningfully better than the 9.3% average in the Consumer Retailing industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Sheng Siong Group’s ROCE currently appears to be excellent.

SGX:OV8 Past Revenue and Net Income, April 4th 2019
SGX:OV8 Past Revenue and Net Income, April 4th 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.

Sheng Siong Group’s Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Sheng Siong Group has total liabilities of S$141m and total assets of S$436m. As a result, its current liabilities are equal to approximately 32% of its total assets. Sheng Siong Group has a medium level of current liabilities, boosting its ROCE somewhat.

What We Can Learn From Sheng Siong Group’s ROCE

Even so, it has a great ROCE, and could be an attractive prospect for further research. But note: Sheng Siong Group may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.