In This Article:
Today we’ll evaluate The Star Entertainment Group Limited (ASX:SGR) to determine whether it could have potential as an investment idea. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. 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 measures the amount of pre-tax profits a company can generate from the capital employed in its 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.’
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 Star Entertainment Group:
0.079 = AU$394m ÷ (AU$5.4b – AU$420m) (Based on the trailing twelve months to December 2018.)
Therefore, Star Entertainment Group has an ROCE of 7.9%.
View our latest analysis for Star Entertainment Group
Does Star Entertainment Group Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Star Entertainment Group’s ROCE is fairly close to the Hospitality industry average of 9.9%. Separate from how Star Entertainment Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
Our data shows that Star Entertainment Group currently has an ROCE of 7.9%, compared to its ROCE of 5.7% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during 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 Star Entertainment Group.