In This Article:
Today we are going to look at Hanwell Holdings Limited (SGX:DM0) 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. 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 is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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 Hanwell Holdings:
0.06 = S$23m ÷ (S$562m - S$176m) (Based on the trailing twelve months to June 2019.)
Therefore, Hanwell Holdings has an ROCE of 6.0%.
View our latest analysis for Hanwell Holdings
Does Hanwell Holdings Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Hanwell Holdings's ROCE is meaningfully below the Packaging industry average of 13%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Hanwell Holdings stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
Our data shows that Hanwell Holdings currently has an ROCE of 6.0%, compared to its ROCE of 4.6% 3 years ago. This makes us wonder if the company is improving. The image below shows how Hanwell Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. If Hanwell Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.