How Do Samson Paper Holdings Limited’s (HKG:731) Returns Compare To Its Industry?
Today we'll look at Samson Paper Holdings Limited (HKG:731) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to 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.
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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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'.
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 Samson Paper Holdings:
0.049 = HK$163m ÷ (HK$6.6b - HK$3.3b) (Based on the trailing twelve months to September 2019.)
So, Samson Paper Holdings has an ROCE of 4.9%.
View our latest analysis for Samson Paper Holdings
Does Samson Paper Holdings Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Samson Paper Holdings's ROCE is meaningfully below the Trade Distributors industry average of 7.2%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Setting aside the industry comparison for now, Samson Paper Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Our data shows that Samson Paper Holdings currently has an ROCE of 4.9%, compared to its ROCE of 3.7% 3 years ago. This makes us think the business might be improving. You can see in the image below how Samson Paper Holdings's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. If Samson Paper Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Samson Paper Holdings's Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Samson Paper Holdings has current liabilities of HK$3.3b and total assets of HK$6.6b. Therefore its current liabilities are equivalent to approximately 50% of its total assets. Samson Paper Holdings's middling level of current liabilities have the effect of boosting its ROCE a bit.
Our Take On Samson Paper Holdings's ROCE
With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
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.
