In This Article:
Today we'll evaluate Enviro-Hub Holdings Ltd. (SGX:L23) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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. 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?
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 Enviro-Hub Holdings:
0.0069 = S$1.1m ÷ (S$181m - S$16m) (Based on the trailing twelve months to June 2019.)
Therefore, Enviro-Hub Holdings has an ROCE of 0.7%.
See our latest analysis for Enviro-Hub Holdings
Is Enviro-Hub Holdings's ROCE Good?
One way to assess ROCE is to compare similar companies. In this analysis, Enviro-Hub Holdings's ROCE appears meaningfully below the 17% average reported by the Metals and Mining industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Enviro-Hub Holdings's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
We can see that, Enviro-Hub Holdings currently has an ROCE of 0.7%, less than the 1.5% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Enviro-Hub Holdings'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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. We note Enviro-Hub Holdings could be considered a cyclical business. You can check if Enviro-Hub Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.