Why ABR Holdings Limited’s (SGX:533) Return On Capital Employed Might Be A Concern

Simply Wall St

Today we are going to look at ABR Holdings Limited (SGX:533) 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. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its 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.

How Do You Calculate Return On Capital Employed?

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 ABR Holdings:

0.017 = S$2.0m ÷ (S$151m - S$33m) (Based on the trailing twelve months to September 2019.)

Therefore, ABR Holdings has an ROCE of 1.7%.

Check out our latest analysis for ABR Holdings

Is ABR Holdings's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, ABR Holdings's ROCE appears to be significantly below the 6.3% average in the Hospitality industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how ABR Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.8% available in government bonds. It is likely that there are more attractive prospects out there.

ABR Holdings's current ROCE of 1.7% is lower than its ROCE in the past, which was 5.8%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how ABR Holdings's ROCE compares to its industry. Click to see more on past growth.

SGX:533 Past Revenue and Net Income, February 18th 2020

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. If ABR Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Do ABR Holdings's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

ABR Holdings has total assets of S$151m and current liabilities of S$33m. As a result, its current liabilities are equal to approximately 22% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

Our Take On ABR Holdings's ROCE

ABR Holdings has a poor ROCE, and there may be better investment prospects out there. Of course, you might also be able to find a better stock than ABR Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

ABR Holdings is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.

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.