The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and want to begin learning the link between Wilmar International Limited (SGX:F34)’s return fundamentals and stock market performance.
Purchasing Wilmar International gives you an ownership stake in the company. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. To understand Wilmar International’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.
Calculating Return On Capital Employed for F34
Choosing to invest in Wilmar International comes at the cost of investing in another potentially favourable company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business’ ability to grow your capital at a level that grants an investment over other companies. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Wilmar International is good at growing investor capital. F34’s ROCE is calculated below:
ROCE Calculation for F34
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$1.9b ÷ (US$45.5b – US$24.6b) = 9.0%
As you can see, F34 earned SGD9 from every SGD100 you invested over the previous twelve months. Comparing this to a healthy 15% benchmark shows Wilmar International is currently unable to return a satisfactory amount to owners for the use of their capital, which isn’t good for investors who have forgone other potentially solid companies.
A deeper look
Wilmar International’s relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Wilmar International is in an adverse position, but this can change if these factors improve. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. Looking three years in the past, it is evident that F34’s ROCE has risen from 6.9%, indicating the company’s capital returns have stengthened. With this, the current earnings of US$1.9b improved from US$1.7b and capital employed has deteriorated in response to a greater amount of current liabilities used (meaning the company has used more borrowed money than shareholder capital to produce earnings) , which means the company has been able to improve ROCE by growing earnings and simultaneously putting less capital to work.
Although Wilmar International’s ROCE is currently below the acceptable benchmark, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and valuation to determine if an opportunity exists that isn’t made apparent by looking at past data. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for F34’s future growth? Take a look at our free research report of analyst consensus for F34’s outlook.
- Valuation: What is F34 worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether F34 is currently undervalued by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.