Today we'll look at Trigiant Group Limited (HKG:1300) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we calculate ROCE. 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 measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
How Do You Calculate Return On Capital Employed?
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 Trigiant Group:
0.13 = CN¥457m ÷ (CN¥5.4b - CN¥1.8b) (Based on the trailing twelve months to December 2019.)
Therefore, Trigiant Group has an ROCE of 13%.
Does Trigiant Group Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Trigiant Group's ROCE appears to be substantially greater than the 5.9% average in the Communications industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Trigiant Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
You can see in the image below how Trigiant Group's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. How cyclical is Trigiant Group? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How Trigiant Group's Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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.
Trigiant Group has current liabilities of CN¥1.8b and total assets of CN¥5.4b. Therefore its current liabilities are equivalent to approximately 34% of its total assets. Trigiant Group has a medium level of current liabilities, which would boost the ROCE.
The Bottom Line On Trigiant Group's ROCE
Trigiant Group's ROCE does look good, but the level of current liabilities also contribute to that. Trigiant Group 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.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.