Today we’ll evaluate TIL Enviro Limited (
HKG:1790
) to determine whether it could have potential as an investment idea. Specifically,last podcast on the left unit 731 we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting 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. 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 TIL Enviro:
0.13 = HK$125m ÷ (HK$1.8b – HK$803m) (Based on the trailing twelve months to December 2017.)
Therefore,
TIL Enviro has an ROCE of 13%.
View our latest analysis for TIL Enviro
Does TIL Enviro Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that TIL Enviro’s ROCE is fairly close to the Commercial Services industry average of 11%. Independently of how TIL Enviro compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
SEHK:1790 Past Revenue and Net Income, March 1st 2019
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is TIL Enviro? You can see for yourself by looking at this
free
graph of past earnings, revenue and cash flow
.
Do TIL Enviro’s Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
TIL Enviro has total liabilities of HK$803m and total assets of HK$1.8b. Therefore its current liabilities are equivalent to approximately 45% of its total assets. TIL Enviro has a medium level of current liabilities, which would boost the ROCE.
What We Can Learn From TIL Enviro’s ROCE
TIL Enviro’s ROCE does look good, but the level of current liabilities also contribute to that. Of course
you might be able to find a better stock than TIL Enviro
. So you may wish to see this
free
collection of other companies that have grown earnings strongly.
For those who like to find
winning investments
this
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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 qualitative material.
If you spot an error that warrants correction, please contact the editor at
. 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.
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