The government is banking that corporate tax cuts will lure more processing plants to Alberta
Today we are going to look at Key Ware Electronics Co., Ltd. (GTSM:5498) to see whether it might be an attractive investment prospect. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we’ll work out how to 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 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. 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’.
So, How Do We Calculate ROCE?
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 Key Ware Electronics:
0.018 = NT$37m ÷ (NT$3.1b – NT$1.0b) (Based on the trailing twelve months to September 2019.)
Therefore, Key Ware Electronics has an ROCE of 1.8%.
Is Key Ware Electronics’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Key Ware Electronics’s ROCE appears to be significantly below the 10.0% average in the Machinery industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Key Ware Electronics’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
In our analysis, Key Ware Electronics’s ROCE appears to be 1.8%, compared to 3 years ago, when its ROCE was 1.2%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Key Ware Electronics’s past growth compares to other companies.
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, after all, simply a snap shot of a single year. You can check if Key Ware Electronics has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Key Ware Electronics’s ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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.
Key Ware Electronics has total assets of NT$3.1b and current liabilities of NT$1.0b. As a result, its current liabilities are equal to approximately 33% of its total assets. With a medium level of current liabilities boosting the ROCE a little, Key Ware Electronics’s low ROCE is unappealing.
Our Take On Key Ware Electronics’s ROCE
There are likely better investments out there. You might be able to find a better investment than Key Ware Electronics. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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UCP optimistic Alberta can attract $1.4 billion in agri-food investment – Calgary Herald
The UCP government is banking that corporate tax cuts will lure more agri-food processing plants to Alberta, helping the province meet ambitious new targets for growing the value-added agriculture sector.
As announced in this week’s provincial budget, the government has set the goal of attracting $1.4 billion in direct investment over the next four years in value-added agricultural processing in Alberta. Agriculture Minister Devin Dreeshen said the possibility exists to create 2,000 new direct jobs in targeted sectors, such as canola processing, pork processing, the malt industry, the greenhouse industry and the emerging plant protein sector.
“With a lot of our commodities, over 90 per cent of the product is just shipped around the world to be processed elsewhere. And that’s something we’d like to have more of done within the province,” Dreeshen said in an interview, adding the government believes its move to reduce the corporate tax rate to eight per cent by 2022 as well as its red tape reduction initiatives will go a long way toward attracting investors.
He added the government will also engage directly with investors via trade missions, actively promoting agri-food opportunities in Alberta.
“With the tax advantage as well as the regulatory advantage, we think there is a huge potential to attract investment here,” Dreeshen said. “But we need to have a team that goes out and tries actively to bring that investment here … you don’t win by sitting home hoping that people come to you.”
Increasing the value of agriculture by doing more processing at home and creating additional markets for Alberta farmers has long been a goal of the province’s producer groups, and there have been some major wins on that front in recent years. Last fall, for example, New Brunswick-based Cavendish Farms opened a $430-million potato processing plant in the Lethbridge area, one of the largest private investments ever in the region. In fact, the Lethbridge region as a whole has become a hub for food processing in Alberta, with more than 120 established processing businesses, including Richardson Oilseed, Sunrise Poultry Processors and Sunnyrose Cheese (Agropur).
In addition, there may be opportunities for Alberta’s pulse sector as a result of the growing global interest in plant-based protein. In 2018, Protein Industries Canada — a group of businesses, post-secondary institutions and non-profits — was awarded $153 million from the federal government through its Innovation Superclusters Initiative. The group, which aims to make Canada a world leader in plant protein, has funding available for projects that will help the Canadian prairies transform from an exporter of raw peas and lentils to a value-added processor.
Botaneco Inc., which currently has 25 employees and an office in northeast Calgary, has developed a unique processing technology to extract protein and other ingredients from crops such as pulses, hemp and canola and received $8 million from Protein Industries Canada last summer.
Ward Toma, general manager of Alberta Canola, said the canola industry has probably the strongest value-added component of any Canadian agriculture commodity, with the capacity to process about half the canola harvested annually into oil and meal. The remainder is exported as seed, but that became a problem in 2019 when China, Canada’s No 1 canola market, stopped importing Canadian product.
Toma said there is potential to expand value-added processing even more in Alberta, adding the Chinese import restriction on canola seed could be incentive for a company to invest in additional crushing capacity. Canola growers are also pushing the province to increase the renewable fuel standard for diesel from the current requirement of two per cent renewable content to five per cent — a move Toma says could create more processing jobs.
However, he cautioned that value-added agriculture has been a goal for decades in Alberta, and the province has only made “small steps” toward achieving it.
“It is, of course, the ultimate goal,” Toma said. “We want to make food products here and not ship ingredients somewhere else to be assembled. But you come up against competing interests in other countries — every other country has the same goal we do.”
Thursday’s provincial budget also set the goal of growing Alberta’s exports in primary agriculture to 7.5 per cent per year, and its value-added exports to 8.5 per cent per year. The goal is ambitious, given the hardships farmers have faced in the last year, said Dave Bishop, chair of the Alberta Barley Commission.
“We had the canola issue, the harvest from hell, now there’s the coronavirus,” Bishop said. “And, of course, the (Coastal GasLink protests and rail) blockades just kind of put the icing on the cake … I think the eight per cent would be doable if we don’t have any unforeseen, unknown circumstances like we did this last crop year.”
The UCP’s targets for agriculture come at the same time the government announced it will eliminate $46 million in spending from the Ministry of Agriculture, a 38 per cent reduction. A total of 277 full-time positions will be eliminated from the department this year, although no details are available about what types of positions will be affected.
In an interview, Dreeshen said the government is committed to finding efficiencies within the ministry while still maintaining services, but Bishop said agriculture groups are concerned.
“We’re very worried about the cuts, the loss of people, and where that leaves us,” Bishop said.
What is a retiree’s most important investment decision? – MarketWatch
By Mark Hulbert
Published: Feb 28, 2020 12:22 pm ET
New research calls into question what retirement planners often focus on
On what should you spend more time in devising your retirement portfolio:
Asset allocation (how much to allocate in the first place to equities, bonds, and so forth) or security selection (which individual mutual funds or ETFs to purchase once you’ve decided how much to allocate to a particular asset class)?
The answer from many investors and financial planners is the latter, on the theory that the factors that affect the former (age, risk tolerance, etc.) don’t change very often or by much when they do. Security selection, in the contrast, is where the greatest value gets added.
A new study, forthcoming in the academic journal Critical Finance Review, should cause you to reconsider. The study is entitled “Carhart (1997) Mutual Fund Performance Persistence Disappears Out of Sample.” Its authors are James Choi, a professor of finance at Yale University, and Kevin Zhao, a Ph.D. candidate at that institution. (Full disclosure: Prof. Choi was an intern in my office in 1996.)
The “Carhart (1997)” referred to in the title is a seminal study conducted in the 1990s by Mark Carhart, entitled “On Persistence in Mutual Fund Performance.” Carhart at the time was a finance professor at the University of Southern California; he subsequently became co-chief investment officer at the Quantitative Investment Strategies Group at Goldman Sachs Asset Management, and after that, chief investment officer at Kepos Capital. Carhart found that the funds with the best returns in the previous calendar year produced better returns in the subsequent year than the previous year’s worst performers.
To be sure, Carhart did not attribute this persistence to superior ability on the part of mutual fund managers. He argued that it was instead caused by the tendency of one year’s best-performing stocks to be above-average performers in the next year as well. This nuance was lost on many financial planners, however, who cared less about why “hot hands” persist in the mutual fund arena and more on the mere fact that they exist.
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Choi’s and Zhao’s new research calls into question even this un-nuanced interpretation of Carhart’s findings. They found that almost all of the statistical significance in Carhart’s study derives from data up through the late 1970s. Over the nearly four decades since then, in contrast, there has not been a statistically significant difference in the risk-adjusted performances of the previous year’s top performing mutual funds and the previous year’s worst.
To put that another way, the historical data suggesting year-to-year persistence in mutual fund rankings is largely an artifact of the period prior to the 1980s.
This is illustrated in the accompanying chart. It shows the difference in the trailing 10-year returns of two hypothetical portfolios: The first contained the 10% of U.S. equity mutual funds with the best returns in the prior calendar year, while the second contained the decile of worst funds. The blue shading shows those differences that are significant at the 95% confidence level that statisticians often use when determining if a result is more than just random luck.
Notice that, after the 1970s, there have been just a handful of years for which there is statistical significance for the trailing 10-year difference between the top and bottom decile portfolios. And since the turn of the century there has been no ten-year period with such significance. Furthermore, when the researchers expanded their focus to the entire period since 1980, rather than to ten-year intervals along the way, they found no statistically significant difference.
This late-1970s inflexion point is decades earlier than what many analysts and investors had previously assumed—that a strategy of betting on the previous year’s winners had only stopped working in the last decade. To the extent that had been the case, one could plausibly argue that this only a temporary state of affairs.
But not if the approach hasn’t worked for four decades.
There are several investment implications of this new research. The most important is that, because there is far less performance persistence in the mutual fund arena than previously thought, energies spent on selecting a mutual fund are likely a waste of time. Once you have decided how much to allocate to a given asset class, then you should invest that allocation in a low-cost index fund.
This investment implication doesn’t mean that asset allocation now all of a sudden is more important than it was before. But, relative to security selection, which is now seen to be little more than a fool’s errand, asset allocation will be seen by many to become more important.
Some of my clients are disappointed when they hear advice like this, since it means they need to give up the dream of beating the market. But I like to reframe the issue differently. Results of study such as this one liberate us from poring over the year-to-year performance rankings—enabling us instead to focus on what’s really important.
Investment opportunities arising from the coronavirus and the hit to the global supply chain – The Globe and Mail
Regina Chi is vice-president and portfolio manager at AGF Investments Inc.
The COVID-19 fear trade is in play. Global stock markets have been fluctuating between relief and fear along with positive or negative news about the coronavirus outbreak, which has spread from Wuhan, China, to South Korea (the country with the highest number of ex-China reported cases), Europe (including Italy, with hundreds of confirmed infections), the Middle East, the United States, Canada and South America. In fact, by the end of February, the number of new reported COVID-19 cases outside China was outpacing those inside the country – a sign either that China’s radical attempts to combat the virus within its borders are working, or that the coronavirus epidemic is fast becoming a pandemic.
It’s unclear how many people will ultimately be affected by COVID-19, or how many weeks or months it will take to run its course. If it holds true to similar epidemics, however, it will run its course. From an investor’s perspective, it is not too soon to look beyond headline-driven fear and ask what the long-term impact will be. Neither is it too soon to try to identify opportunities. In our view, those will most likely arise from the disruption of global supply chains that rely on China – a structural change that was already taking place, but to which the coronavirus event may add both momentum and permanence.
As grave as the COVID-19 outbreak has been in humanitarian terms, the response to it might have the bigger impact in economic terms. Compared with its handling of SARS in 2002-2003, the Chinese government’s efforts to contain this coronavirus have been restrictive and extensive. Wuhan and more than a dozen other cities are in quarantine, affecting about 50 million people and nearly 800 million people – roughly half of China’s population – are living under various forms of travel restrictions, according to CNN. Meanwhile, governments at all levels have introduced a raft of regulations, transport blockades, extended work holidays and mandatory factory closures.
These restrictions have put a tourniquet on supply chains. One Taiwanese company we spoke to has nearly 100% of its revenues originating in China, and according to management only 20% of its production is up and running; the CFO says that “there are so many new controls in place in various cities in China, preventing companies and people to resume normal activities.” At another company in which we have an interest, one executive told us that reopening its factory required seven government approvals. Depending on the success of the COVID-19 containment, unwinding the various restrictions affecting Chinese supply chains will take a significant amount of time, creating a bottleneck to the resumption of production.
Another will be labour. In much of China, manufacturers in cities rely heavily on workers from rural regions. In Wuhan – a major auto manufacturing hub – many migrant workers (no one can say for certain how many) returned to their homes for the Jan. 24-30 Lunar New Year holiday before quarantine was imposed on Jan. 23. Government controls and the fear of going outside have curtailed spending and many factories are not at full capacity due to a lack of staff with workers still in their hometowns or spending two weeks in quarantine. Even after the COVID-19 epidemic dissipates, we expect a large portion of these migrant workers will return to work in the second quarter, leading to labour shortages and lower than expected capacity utilization in the meantime.
For companies whose supply chains have relied heavily on China, this is a wake-up call. If they haven’t already, many will be forced to reassess their exposure to China and look elsewhere. Of course, this trend started long before the COVID-19 outbreak. Rising labour costs and an aging workforce have been two contributing factors; the U.S.-China trade war has been another. Other low-cost jurisdictions have been beneficiaries. For example, Vietnam, Taiwan, Singapore, India and Malaysia all gained export share in the U.S. market between December 2017 and the end of last year, as China’s share declined. Meanwhile, despite a generally stagnant economy, Mexico now has a current account surplus thanks to surging non-oil exports mainly to the United States.
With COVID-19, global companies can now add the risk of a public health emergency to their list of reasons to diversify supply chains out of China. This will present opportunities for investors, especially in countries trying to take advantage – India, for instance, is aggressively trying to lure manufacturers with lower taxes– and in companies that have a head-start. One of those is South Korea’s Samsung Electronics Co Ltd., which moved its major mobile production site to Vietnam five years ago. As well, Samsung has low sales exposure to China – its smartphones account for less than 5% of mobile revenues– so any impact from contracting Chinese demand will be relatively limited.
Eclat Textile Co. Ltd., a Taiwanese garment manufacturer that includes some of the world’s biggest sportswear brands as clients, was also an early mover to Vietnam and closed its only Chinese manufacturing base in Wuxi at the end of 2016. It also has facilities in Taiwan and Cambodia and recently announced plans to build a plant in Indonesia.
Clearly, China’s importance in a globalized economy has grown significantly since the 2002-2003 SARS outbreak, the most obvious precedent for today’s crisis, that originated in the Guangdong province of China and spread to more than two dozen countries. Seventeen years ago, China comprised less than four percent global GDP; today, it accounts for more than 15%. Yet no trend lasts forever. China’s pre-eminence in global supply chains is eroding – and the COVID-19 outbreak will accelerate the shift.
AGF owns stock in Samsung Electronics Co. Ltd. and Eclat Textile Co. Ltd.
The views expressed are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds or investment strategies. References to specific securities should not be considered as investment advice or recommendations.
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