# Riverstone Holdings Limited (SGX:AP4)’s Return on Capital

This analysis is intended to introduce important early concepts to people who are starting to invest and want a simplistic look at the return on Riverstone Holdings Limited (SGX:AP4) stock.

Buying Riverstone Holdings makes you a partial owner of the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. Your return is tied to AP4’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. To understand Riverstone Holdings’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.

### Riverstone Holdings’s Return On Capital Employed

Choosing to invest in Riverstone Holdings 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 Riverstone Holdings is good at growing investor capital. I have calculated Riverstone Holdings’s ROCE for you below:

ROCE Calculation for AP4

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = RM150m ÷ (RM838m – RM126m) = 21%

AP4’s 21% ROCE means that for every SGD100 you invest, the company creates SGD21.1. This makes Riverstone Holdings attractively profitable when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future and is able to either provide solid dividends or reinvestment opportunities, your capital will enlarge at a quick rate over time.

### Does this mean I should invest?

Although Riverstone Holdings is in a favourable position, you should know that this could change if the company is unable to maintain a strong ROCE above the benchmark, which will depend on the behaviour of the underlying variables (EBT and capital employed). Therefore, investors need to be confident in the trend of the inputs in the formula above, so that Riverstone Holdings will continue the solid returns. Looking three years in the past, it is evident that AP4’s ROCE has deteriorated from 22%, indicating the company’s capital returns have declined. We can see that earnings have actually increased from RM81m to RM150m but capital employed has increased by a relatively larger volume because of a hike in the level of total assets , which suggests investor’s ROCE has fallen because the company requires more capital to create earnings despite the previous growth in EBT.

### Next Steps

Although Riverstone Holdings’s ROCE has decreased over the past few years, the company still remains an attractive candidate that is capable of producing solid capital returns and a potentially strong return on investment. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like future prospects and valuation. Without considering these fundamentals, you cannot be sure if the downward path is a signal to run, or just a blip in an otherwise solid return profile. Riverstone Holdings’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.

1. Future Outlook: What are well-informed industry analysts predicting for AP4’s future growth? Take a look at our free research report of analyst consensus for AP4’s outlook.
2. Valuation: What is AP4 worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether AP4 is currently mispriced by the market.
3. 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 editorial-team@simplywallst.com.