Today we'll evaluate Intertape Polymer Group Inc. (TSE:ITP) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
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.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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 Intertape Polymer Group:
0.12 = US$103m ÷ (US$1.1b - US$166m) (Based on the trailing twelve months to September 2019.)
Therefore, Intertape Polymer Group has an ROCE of 12%.
Does Intertape Polymer Group Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. It appears that Intertape Polymer Group's ROCE is fairly close to the Packaging industry average of 9.8%. Independently of how Intertape Polymer 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 Intertape Polymer 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 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Intertape Polymer Group.
Do Intertape Polymer Group's Current Liabilities Skew Its ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Intertape Polymer Group has total assets of US$1.1b and current liabilities of US$166m. Therefore its current liabilities are equivalent to approximately 16% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
Our Take On Intertape Polymer Group's ROCE
This is good to see, and with a sound ROCE, Intertape Polymer Group could be worth a closer look. There might be better investments than Intertape Polymer Group out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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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