Today we'll evaluate TriNet Group, Inc. (NYSE:TNET) to determine whether it could have potential as an investment idea. 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 up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting 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. 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 TriNet Group:
0.22 = US$241m ÷ (US$2.3b - US$1.2b) (Based on the trailing twelve months to June 2019.)
Therefore, TriNet Group has an ROCE of 22%.
Does TriNet Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that TriNet Group's ROCE is meaningfully better than the 12% average in the Professional Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, TriNet Group's ROCE in absolute terms currently looks quite high.
We can see that, TriNet Group currently has an ROCE of 22% compared to its ROCE 3 years ago, which was 14%. This makes us wonder if the company is improving. The image below shows how TriNet Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect TriNet Group's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
TriNet Group has total assets of US$2.3b and current liabilities of US$1.2b. As a result, its current liabilities are equal to approximately 53% of its total assets. TriNet Group's high level of current liabilities boost the ROCE - but its ROCE is still impressive.
The Bottom Line On TriNet Group's ROCE
In my book, this business could be worthy of further research. TriNet 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.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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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. Thank you for reading.