Today we are going to look at Raffles Infrastructure Holdings Limited (SGX:LUY) 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.

First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

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. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

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 Raffles Infrastructure Holdings:

0.19 = CN¥38m ÷ (CN¥494m - CN¥296m) (Based on the trailing twelve months to June 2019.)

Therefore, Raffles Infrastructure Holdings has an ROCE of 19%.

View our latest analysis for Raffles Infrastructure Holdings

Is Raffles Infrastructure Holdings's ROCE Good?

One way to assess ROCE is to compare similar companies. It appears that Raffles Infrastructure Holdings's ROCE is fairly close to the Luxury industry average of 17%. Separate from Raffles Infrastructure Holdings's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

In our analysis, Raffles Infrastructure Holdings's ROCE appears to be 19%, compared to 3 years ago, when its ROCE was 0.2%. This makes us think the business might be improving. You can see in the image below how Raffles Infrastructure Holdings's ROCE compares to its industry. Click to see more on past growth.

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Raffles Infrastructure Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.