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Is There More To Helloworld Travel Limited (ASX:HLO) Than Its 13% Returns On Capital?

Today we'll look at Helloworld Travel Limited (ASX:HLO) 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. Finally, we'll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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.'

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 Helloworld Travel:

0.13 = AU$53m ÷ (AU$750m - AU$324m) (Based on the trailing twelve months to June 2019.)

So, Helloworld Travel has an ROCE of 13%.

View our latest analysis for Helloworld Travel

Is Helloworld Travel's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. It appears that Helloworld Travel's ROCE is fairly close to the Hospitality industry average of 11%. Separate from Helloworld Travel's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

In our analysis, Helloworld Travel's ROCE appears to be 13%, compared to 3 years ago, when its ROCE was 2.0%. This makes us think the business might be improving. You can see in the image below how Helloworld Travel's ROCE compares to its industry. Click to see more on past growth.

ASX:HLO Past Revenue and Net Income, August 22nd 2019
ASX:HLO Past Revenue and Net Income, August 22nd 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Helloworld Travel.

Do Helloworld Travel's Current Liabilities Skew Its ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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.

Helloworld Travel has total assets of AU$750m and current liabilities of AU$324m. Therefore its current liabilities are equivalent to approximately 43% of its total assets. With this level of current liabilities, Helloworld Travel's ROCE is boosted somewhat.

The Bottom Line On Helloworld Travel's ROCE

While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Helloworld Travel looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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 editorial-team@simplywallst.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.

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