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Is HG Metal Manufacturing Limited (SGX:BTG) Investing Your Capital Efficiently?

Today we'll look at HG Metal Manufacturing Limited (SGX:BTG) and reflect on its potential as an investment. 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, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting 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. All else being equal, a better business will have a higher ROCE. 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?

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 HG Metal Manufacturing:

0.008 = S$923k ÷ (S$173m - S$58m) (Based on the trailing twelve months to December 2019.)

Therefore, HG Metal Manufacturing has an ROCE of 0.8%.

View our latest analysis for HG Metal Manufacturing

Does HG Metal Manufacturing Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, HG Metal Manufacturing's ROCE appears to be significantly below the 2.1% average in the Trade Distributors industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside HG Metal Manufacturing'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.

HG Metal Manufacturing delivered an ROCE of 0.8%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving. You can see in the image below how HG Metal Manufacturing's ROCE compares to its industry. Click to see more on past growth.

SGX:BTG Past Revenue and Net Income, February 24th 2020
SGX:BTG Past Revenue and Net Income, February 24th 2020

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. How cyclical is HG Metal Manufacturing? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Do HG Metal Manufacturing'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

HG Metal Manufacturing has total assets of S$173m and current liabilities of S$58m. Therefore its current liabilities are equivalent to approximately 34% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, HG Metal Manufacturing's ROCE is concerning.

Our Take On HG Metal Manufacturing's ROCE

This company may not be the most attractive investment prospect. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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

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.