Is There More To Taitron Components Incorporated (NASDAQ:TAIT) Than Its 9.8% Returns On Capital?
Today we are going to look at Taitron Components Incorporated (NASDAQ:TAIT) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. All else being equal, a better business will have a higher ROCE. 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 Taitron Components:
0.098 = US$1.3m ÷ (US$14m - US$724k) (Based on the trailing twelve months to June 2019.)
Therefore, Taitron Components has an ROCE of 9.8%.
Check out our latest analysis for Taitron Components
Is Taitron Components's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Taitron Components's ROCE is around the 12% average reported by the Electronic industry. Setting aside the industry comparison for now, Taitron Components's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
We can see that, Taitron Components currently has an ROCE of 9.8% compared to its ROCE 3 years ago, which was 0.7%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Taitron Components's past growth compares to other companies.
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, after all, simply a snap shot of a single year. If Taitron Components is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do Taitron Components'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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Taitron Components has total assets of US$14m and current liabilities of US$724k. As a result, its current liabilities are equal to approximately 5.3% of its total assets. Taitron Components reports few current liabilities, which have a negligible impact on its unremarkable ROCE.
The Bottom Line On Taitron Components's ROCE
Taitron Components looks like an ok business, but on this analysis it is not at the top of our buy list. Of course, you might also be able to find a better stock than Taitron Components. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like Taitron Components better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
