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Today we'll evaluate Suntech S.A. (WSE:SUN) 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 up, we'll look at what ROCE is and how we
calculate it. Then we'll compare its ROCE to similar companies. And
finally, we'll look at how its current liabilities are impacting
ROCE is a measure of a company's yearly pre-tax
profit (its return), relative to the capital employed in the
business. Generally speaking a higher ROCE is better. 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'.
Analysts use this formula to calculate return on
Return on Capital Employed = Earnings Before
Interest and Tax (EBIT) Ã· (Total Assets - Current
0.23 = zÅ554k Ã· (zÅ9.8m - zÅ7.4m) (Based on the
trailing twelve months to March 2019.)
Therefore, Suntech has an ROCE of
View our latest analysis
One way to assess ROCE is to compare similar
companies. It appears that Suntech's ROCE is fairly close to the
Software industry average of 23%. Setting aside the comparison to
its industry for a moment, Suntech's ROCE in absolute terms
currently looks quite high.
Suntech's current ROCE of 23% is lower than 3
years ago, when the company reported a 41% ROCE. Therefore we
wonder if the company is facing new headwinds.
It is important to remember that ROCE shows past
performance, and is not necessarily predictive. 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. How
cyclical is Suntech? You can see for yourself by looking at this
free graph of past earnings,
revenue and cash flow.
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 counter
this, investors can check if a company has high current liabilities
relative to total assets.
Suntech has total liabilities of zÅ7.4m and total
assets of zÅ9.8m. As a result, its current liabilities are equal to
approximately 75% of its total assets. Suntech's high level of
current liabilities boost the ROCE - but its ROCE is still
So to us, the company is potentially worth
investigating further. Suntech shapes up well under this analysis,
but it is far from the only business delivering excellent
numbers . You might also want to check this
free collection of companies
delivering excellent earnings growth.
For those who like to find winning
investments this free list of growing companies
with recent insider purchasing, could be just the ticket.
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
If you spot an error that warrants correction, please contact
the editor at
[email protected] 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. Thank you for reading.