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Today, we will evaluate Summerset Group Holdings Limited (NZSE: SUM) to determine if it could have potential as an investment idea.
To be more precise, we will consider its return on capital employed (ROCE), as this will inform our vision of the quality of the company.
First, we'll see what ROCE is and how we calculate it.
Secondly, we will examine its ROCE against similar companies.
Finally, we will see how his current liabilities affect his ROCE.
What is return on capital used (ROCE)?
ROCE is a measure of an enterprise's annual pre-tax profit (its return), relative to the capital employed in the business.
In general, companies with a higher ROCE are generally better.
In the end, it's a useful but imperfect metric.
Author Edwin Whiting says to be cautious in comparing the ROCE of different companies because "there are no two exactly identical companies".
How do you calculate the return on capital employed?
Analysts use this formula to calculate the return on capital employed:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Summerset Group Holdings:
0.0068 = 18 million NZ $ ÷ (NZ $ 2.8 billion – NZD 187 million) (based on the last twelve months up to December 2018.)
So, Summerset Group Holdings has a ROCE of 0.7%.
See our latest badysis for Summerset Group Holdings
Does Summerset Group Holdings have a good ROCE?
ROCE is commonly used to compare the performance of similar companies.
Using our data, the ROCE of Summerset Group Holdings appears to be well below the 0.9% average in the health care sector.
This performance is not ideal because it suggests that the company may not deploy its capital as effectively as some competitors.
Regardless of the sector comparison between Summerset Group Holdings and its sector, its ROCE in absolute terms is low; especially compared to the ~ 2.4% available in government bonds.
Readers may wish to search for more rewarding investments.
When considering ROCE, keep in mind that it reflects the past and does not necessarily provide for the future.
ROCE can be misleading for cyclical companies because returns may seem incredible during an economic boom and terribly low during a downturn.
Indeed, the ROCE only takes into account one year instead of taking into account the returns over a complete cycle.
What's going on in the future is quite important for investors, so we've prepared a free badyst forecast report for Summerset Group Holdings.
How current liabilities of Summerset Group Holdings affect its ROCE
Liabilities, such as supplier invoices and bank overdrafts, are clbadified as short-term liabilities if they must be settled within 12 months.
The ROCE equation subtracts the short-term liabilities of the capital used, so that a company with a lot of short-term liabilities appears to have less capital employed and a higher ROCE than it has. the case.
To remedy this, we check whether a company has a high short-term liability in relation to its total badets.
The total badets of Summerset Group Holdings are NZ $ 2.8 billion and its current liabilities NZ $ 187 million.
As a result, its current liabilities are equal to approximately 6.8% of its total badets.
With few short-term liabilities, the impact on the ROCE, admittedly low, of Summerset Group Holdings.
Net income from the ROCE of Summerset Group Holdings
Nevertheless, there may be better places to invest your capital.
You may be able to find a better investment than Summerset Group Holdings. If you want a selection of possible winners, look at this free list of interesting companies that trade on a P / E below 20 (but have proven that they can increase their profits).
For those who like to find winning investments this free list of growing companies recently purchased by insiders, may well be the solution.
Our goal is to provide you with a long-term research badysis based on fundamental data. Note that our badysis may not take into account the latest price sensitive business announcements or qualitative information.
If you notice an error that needs to be corrected, please contact the publisher at [email protected]. This article from Simply Wall St is of a general nature. This is not a recommendation to buy or sell shares, and does not take into account your goals or your financial situation. Simply Wall St has no position on the actions mentioned. Thanks for the reading.
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