Today we are going to look at Enviro-Hub Holdings Ltd. (SGX:L23) to see whether it might be an attractive investment prospect. 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. Finally, we'll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the 'return' (pre-tax profit) a company generates from 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. 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 Enviro-Hub Holdings:

0.0062 = S$1.0m ÷ (S$181m - S$17m) (Based on the trailing twelve months to December 2019.)

Therefore, Enviro-Hub Holdings has an ROCE of 0.6%.

View our latest analysis for Enviro-Hub Holdings

Is Enviro-Hub Holdings's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Enviro-Hub Holdings's ROCE is meaningfully below the Metals and Mining industry average of 3.8%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. 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. There are potentially more appealing investments elsewhere.

Enviro-Hub Holdings's current ROCE of 0.6% is lower than 3 years ago, when the company reported a 2.4% ROCE. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Enviro-Hub Holdings's past growth compares to other companies.

It is important to remember that ROCE shows past performance, and is 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. Remember that most companies like Enviro-Hub Holdings are cyclical businesses. You can check if Enviro-Hub Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Enviro-Hub Holdings's Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Enviro-Hub Holdings has current liabilities of S$17m and total assets of S$181m. Therefore its current liabilities are equivalent to approximately 9.3% of its total assets. Enviro-Hub Holdings has a low level of current liabilities, which have a negligible impact on its already low ROCE.

What We Can Learn From Enviro-Hub Holdings's ROCE

Nevertheless, there are potentially more attractive companies to invest in. Of course, you might also be able to find a better stock than Enviro-Hub Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.