Today we are going to look at Asia Pacific Wire & Cable Corporation Limited (NASDAQ:APWC) to see whether it might be an attractive investment prospect. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting 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. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.
So, How Do We Calculate ROCE?
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 Asia Pacific Wire & Cable:
0.044 = US$10m ÷ (US$319m – US$84m) (Based on the trailing twelve months to September 2018.)
So, Asia Pacific Wire & Cable has an ROCE of 4.4%.
Does Asia Pacific Wire & Cable Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In this analysis, Asia Pacific Wire & Cable’s ROCE appears meaningfully below the 10% average reported by the Electrical industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Asia Pacific Wire & Cable stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
Asia Pacific Wire & Cable has an ROCE of 4.4%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. If Asia Pacific Wire & Cable is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do Asia Pacific Wire & Cable’s Current Liabilities Skew Its 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Asia Pacific Wire & Cable has total liabilities of US$84m and total assets of US$319m. As a result, its current liabilities are equal to approximately 26% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.
Our Take On Asia Pacific Wire & Cable’s ROCE
Asia Pacific Wire & Cable has a poor ROCE, and there may be better investment prospects out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
I will like Asia Pacific Wire & Cable 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 firstname.lastname@example.org. 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.