In This Article:
Today we'll look at China Aviation Oil (Singapore) Corporation Ltd (SGX:G92) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting 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. 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 China Aviation Oil (Singapore):
0.045 = US$38m ÷ (US$1.9b - US$1.0b) (Based on the trailing twelve months to December 2019.)
Therefore, China Aviation Oil (Singapore) has an ROCE of 4.5%.
View our latest analysis for China Aviation Oil (Singapore)
Does China Aviation Oil (Singapore) Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, China Aviation Oil (Singapore)'s ROCE appears to be significantly below the 12% average in the Oil and Gas industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how China Aviation Oil (Singapore) stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
You can click on the image below to see (in greater detail) how China Aviation Oil (Singapore)'s past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and 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. We note China Aviation Oil (Singapore) could be considered a cyclical business. Since the future is so important for investors, you should check out our free report on analyst forecasts for China Aviation Oil (Singapore).