In This Article:
Today we'll look at StarHub Ltd (SGX:CC3) 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 of all, we'll work out how to calculate ROCE. 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.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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 StarHub:
0.13 = S$246m ÷ (S$2.7b - S$867m) (Based on the trailing twelve months to June 2019.)
So, StarHub has an ROCE of 13%.
Check out our latest analysis for StarHub
Is StarHub's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, StarHub's ROCE is meaningfully higher than the 11% average in the Wireless Telecom industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how StarHub compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
StarHub's current ROCE of 13% is lower than 3 years ago, when the company reported a 39% ROCE. This makes us wonder if the business is facing new challenges. The image below shows how StarHub's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for StarHub.