In This Article:
Today we are going to look at Powermatic Data Systems Limited (SGX:BCY) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the 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. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
How Do You Calculate Return On Capital Employed?
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 Powermatic Data Systems:
0.11 = S$6.4m ÷ (S$66m - S$7.8m) (Based on the trailing twelve months to March 2019.)
So, Powermatic Data Systems has an ROCE of 11%.
See our latest analysis for Powermatic Data Systems
Does Powermatic Data Systems Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Powermatic Data Systems's ROCE is fairly close to the Communications industry average of 11%. Independently of how Powermatic Data Systems compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
We can see that , Powermatic Data Systems currently has an ROCE of 11% compared to its ROCE 3 years ago, which was 6.3%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Powermatic Data Systems's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is 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 Powermatic Data Systems is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Powermatic Data Systems's Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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.