Yahoo Finance Why We Like Sands China Ltd.’s (HKG:1928) 23% Return On Capital Employed
Today we are going to look at Sands China Ltd. (HKG:1928) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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.
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 Sands China:
0.23 = US$2.3b ÷ (US$12b - US$1.9b) (Based on the trailing twelve months to December 2019.)
So, Sands China has an ROCE of 23%.
See our latest analysis for Sands China
Is Sands China's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Sands China's ROCE is meaningfully higher than the 5.3% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Sands China's ROCE is currently very good.
Our data shows that Sands China currently has an ROCE of 23%, compared to its ROCE of 14% 3 years ago. This makes us think the business might be improving. The image below shows how Sands China's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Sands China's Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
Sands China has total assets of US$12b and current liabilities of US$1.9b. Therefore its current liabilities are equivalent to approximately 16% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
The Bottom Line On Sands China's ROCE
Low current liabilities and high ROCE is a good combination, making Sands China look quite interesting. Sands China shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
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.
