In This Article:
Today we are going to look at Civmec Limited (SGX:P9D) to see whether it might be an attractive investment prospect. 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.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting 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. In brief, it is a useful tool, but it is not without drawbacks. 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'.
How Do You Calculate Return On Capital Employed?
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 Civmec:
0.025 = AU$8.0m ÷ (AU$471m - AU$155m) (Based on the trailing twelve months to September 2019.)
Therefore, Civmec has an ROCE of 2.5%.
See our latest analysis for Civmec
Does Civmec Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Civmec's ROCE appears meaningfully below the 3.6% average reported by the Construction 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 Civmec stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
Civmec's current ROCE of 2.5% is lower than its ROCE in the past, which was 8.4%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Civmec's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. If Civmec is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.