U.S. markets closed
  • S&P 500

    4,134.94
    -28.32 (-0.68%)
     
  • Dow 30

    33,821.30
    -256.33 (-0.75%)
     
  • Nasdaq

    13,786.27
    -128.50 (-0.92%)
     
  • Russell 2000

    2,188.21
    -43.79 (-1.96%)
     
  • Crude Oil

    62.61
    -0.77 (-1.21%)
     
  • Gold

    1,779.20
    +8.60 (+0.49%)
     
  • Silver

    25.88
    +0.04 (+0.15%)
     
  • EUR/USD

    1.2041
    0.0000 (-0.00%)
     
  • 10-Yr Bond

    1.5620
    -0.0390 (-2.44%)
     
  • GBP/USD

    1.3935
    -0.0049 (-0.35%)
     
  • USD/JPY

    108.0720
    -0.0780 (-0.07%)
     
  • BTC-USD

    56,846.55
    +841.14 (+1.50%)
     
  • CMC Crypto 200

    1,289.01
    +54.59 (+4.42%)
     
  • FTSE 100

    6,859.87
    -140.21 (-2.00%)
     
  • Nikkei 225

    29,100.38
    -584.99 (-1.97%)
     

Shareholders Should Look Hard At Trinseo S.A.’s (NYSE:TSE) 2.1%Return On Capital

  • Oops!
    Something went wrong.
    Please try again later.
Simply Wall St
  • Oops!
    Something went wrong.
    Please try again later.

Today we are going to look at Trinseo S.A. (NYSE:TSE) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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 Trinseo:

0.021 = US$46m ÷ (US$2.7b - US$539m) (Based on the trailing twelve months to September 2019.)

Therefore, Trinseo has an ROCE of 2.1%.

Check out our latest analysis for Trinseo

Does Trinseo Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Trinseo's ROCE appears to be significantly below the 10% average in the Chemicals industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Trinseo compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.7% available in government bonds. There are potentially more appealing investments elsewhere.

Trinseo's current ROCE of 2.1% is lower than its ROCE in the past, which was 19%, 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Trinseo's past growth compares to other companies.

NYSE:TSE Past Revenue and Net Income, January 20th 2020
NYSE:TSE Past Revenue and Net Income, January 20th 2020

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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Trinseo.

How Trinseo's Current Liabilities Impact 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Trinseo has total liabilities of US$539m and total assets of US$2.7b. Therefore its current liabilities are equivalent to approximately 20% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

Our Take On Trinseo's ROCE

That's not a bad thing, however Trinseo has a weak ROCE and may not be an attractive investment. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.

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. Thank you for reading.