In This Article:
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Today we’ll look at Cortina Holdings Limited (SGX:C41) and reflect on its potential as an investment. 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. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
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. In brief, it is a useful tool, but it is not without drawbacks. 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?
Analysts use this formula to calculate return on capital employed:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Cortina Holdings:
0.19 = S$30m ÷ (S$268m – S$67m) (Based on the trailing twelve months to December 2018.)
Therefore, Cortina Holdings has an ROCE of 19%.
Check out our latest analysis for Cortina Holdings
Does Cortina Holdings Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Cortina Holdings’s ROCE appears to be substantially greater than the 12% average in the Specialty Retail industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Cortina Holdings compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
In our analysis, Cortina Holdings’s ROCE appears to be 19%, compared to 3 years ago, when its ROCE was 12%. This makes us think about whether the company has been reinvesting shrewdly.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. If Cortina Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.