Today we'll evaluate Corporate Travel Management Limited (ASX:CTD) 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.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Corporate Travel Management:
0.19 = AU$124m ÷ (AU$1.0b - AU$368m) (Based on the trailing twelve months to June 2019.)
Therefore, Corporate Travel Management has an ROCE of 19%.
Does Corporate Travel Management Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Corporate Travel Management's ROCE is meaningfully better than the 12% average in the Hospitality industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Corporate Travel Management's ROCE currently appears to be excellent.
You can click on the image below to see (in greater detail) how Corporate Travel Management's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Corporate Travel Management'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.
Corporate Travel Management has total liabilities of AU$368m and total assets of AU$1.0b. Therefore its current liabilities are equivalent to approximately 37% of its total assets. A medium level of current liabilities boosts Corporate Travel Management's ROCE somewhat.
Our Take On Corporate Travel Management's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Corporate Travel Management 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.
I will like Corporate Travel Management better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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