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Why Sands China Ltd.’s (HKG:1928) Return On Capital Employed Is Impressive

Today we’ll evaluate Sands China Ltd. (HKG:1928) to determine whether it could have potential as an investment idea. 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. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed 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.’

So, How Do We Calculate ROCE?

The formula for calculating the return on capital employed is:

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Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

Or for Sands China:

0.26 = US$1.8b ÷ (US$10b – US$1.9b) (Based on the trailing twelve months to June 2018.)

So, Sands China has an ROCE of 26%.

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Is Sands China’s ROCE Good?

One way to assess ROCE is to compare similar companies. Sands China’s ROCE appears to be substantially greater than the 5.2% average in the Hospitality industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, Sands China’s ROCE in absolute terms currently looks quite high.

SEHK:1928 Last Perf January 14th 19
SEHK:1928 Last Perf January 14th 19

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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Sands China’s Current Liabilities And Their Impact On Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.

Sands China has total assets of US$10b and current liabilities of US$1.9b. Therefore its current liabilities are equivalent to approximately 18% of its total assets. The fairly low level of current liabilities won’t have much impact on the already great ROCE.

The Bottom Line On Sands China’s ROCE

With low current liabilities and a high ROCE, Sands China could be worthy of further investigation. Of course you might be able to find a better stock than Sands China. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like Sands China better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.