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Do Thai Beverage Public Company Limited’s (SGX:Y92) Returns On Capital Employed Make The Cut?

Today we are going to look at Thai Beverage Public Company Limited (SGX:Y92) 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. 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. 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'.

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 Thai Beverage:

0.094 = ฿35b ÷ (฿413b - ฿45b) (Based on the trailing twelve months to December 2019.)

Therefore, Thai Beverage has an ROCE of 9.4%.

Check out our latest analysis for Thai Beverage

Is Thai Beverage's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Thai Beverage's ROCE is around the 12% average reported by the Beverage industry. Aside from the industry comparison, Thai Beverage's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

Thai Beverage's current ROCE of 9.4% is lower than 3 years ago, when the company reported a 18% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Thai Beverage's past growth compares to other companies.

SGX:Y92 Past Revenue and Net Income March 31st 2020
SGX:Y92 Past Revenue and Net Income March 31st 2020

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. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Thai Beverage.

Do Thai Beverage's Current Liabilities Skew 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Thai Beverage has current liabilities of ฿45b and total assets of ฿413b. As a result, its current liabilities are equal to approximately 11% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

What We Can Learn From Thai Beverage's ROCE

That said, Thai Beverage's ROCE is mediocre, there may be more attractive investments around. Of course, you might also be able to find a better stock than Thai Beverage. So you may wish to see this free collection of other companies that have grown earnings strongly.

Thai Beverage is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.