Evaluating Suntech S.A.’s (WSE:SUN) Investments In Its Business

Simply Wall St - finance.yahoo.com Posted 11 months ago
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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 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. 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'.

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

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

Or for Suntech:

0.23 = zł554k ÷ (zł9.8m - zł7.4m) (Based on the trailing twelve months to March 2019.)

Therefore, Suntech has an ROCE of 23%.

View our latest analysis for Suntech

Is Suntech's ROCE Good?

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.

WSE:SUN Past Revenue and Net Income, June 12th 2019

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.

What Are Current Liabilities, And How Do They Affect Suntech's ROCE?

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 zł7.4m and total assets of zł9.8m. 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 impressive.

Our Take On Suntech's ROCE

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.

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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.

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.