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WSP Holdings Ltd (NYSE:WH)
Return on Capital
-5.84% (As of Mar. 2013)

Return on capital measures how well a company generates cash flow relative to the capital it has invested in its business. WSP Holdings Ltd's annualized return on capital (ROC) for the quarter that ended in Mar. 2013 was -5.84%.

Definition

WSP Holdings Ltd's annualized Return on Capital (ROC) for the fiscal year that ended in Dec. 2012 is calculated as:

 Return on Capital (ROC) (A: Dec. 2012 ) = (EBIT - Adjusted Taxes) / (Book Value of Debt + Book Value of Equity - Cash) = Net Income / (Total Current Assets + Property, Plant and Equipment + Other Current Assets) = -84.185 / (732.431 + 597.619 + 254.379) = -5.31 %

WSP Holdings Ltd's annualized Return on Capital (ROC) for the quarter that ended in Mar. 2013 is calculated as:

 Return on Capital (ROC) (Q: Mar. 2013 ) = (EBIT - Adjusted Taxes) / (Book Value of Debt + Book Value of Equity - Cash) = Net Income / (Total Current Assets + Property, Plant and Equipment + Other Current Assets) = -103.304 / (693.252 + 587.504 + 493.678) = -5.82 %

Note: The Net Income data used here is four times the quarterly (Mar. 2013) net income data.

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.

Explanation

Return on Capital measures how well a company generates cash flow relative to the capital it has invested in its business. The reason book values of debt and equity are used is because the book values are the capital the company received when issuing the debt or receiving the equity investments.

There are four key components to this definition. The first is the use of operating income rather than net income in the numerator. The second is the tax adjustment to this operating income, computed as a hypothetical tax based on an effective or marginal tax rate. The third is the use of book values for invested capital, rather than market values. The final is the timing difference; the capital invested is from the end of the prior year whereas the operating income is the current years number.

Why is Return on Capital important?

Because it costs money to raise capital. A firm that generates higher returns on investment than it costs the company to raise the capital needed for that investment is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases, whereas a firm that earns returns that do not match up to its cost of capital will destroy value as it grows.

Be Aware

Like ROE and ROA, ROC is calculated with only 12 months of data. Fluctuations in the companys earnings or business cycles can affect the ratio drastically. It is important to look at the ratio from a long term perspective.

Related Terms

Historical Data

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.

WSP Holdings Ltd Annual Data

 Dec04 Dec05 Dec06 Dec07 Dec08 Dec09 Dec10 Dec11 Dec12 ROC 0.00 0.00 7.77 12.18 7.81 6.61 0.27 -8.30 -3.69 -5.31

WSP Holdings Ltd Quarterly Data

 Dec10 Mar11 Jun11 Sep11 Dec11 Mar12 Jun12 Sep12 Dec12 Mar13 ROC -14.80 -3.08 -3.80 -3.16 -4.08 -3.32 -3.48 -4.76 -7.36 -5.84
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