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What Can We Make Of Taptica International Ltd’s (LON:TAP) High Return On Capital?

Simply Wall St

Today we'll evaluate Taptica International Ltd (LON:TAP) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its 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 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. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Taptica International:

0.21 = US$27m ÷ (US$197m - US$67m) (Based on the trailing twelve months to December 2018.)

Therefore, Taptica International has an ROCE of 21%.

Check out our latest analysis for Taptica International

Does Taptica International Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, we find that Taptica International's ROCE is meaningfully better than the 8.5% average in the Media industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Taptica International's ROCE in absolute terms currently looks quite high.

Our data shows that Taptica International currently has an ROCE of 21%, compared to its ROCE of 5.9% 3 years ago. This makes us wonder if the company is improving.

AIM:TAP Past Revenue and Net Income, April 24th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How Taptica International's Current Liabilities Impact 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.

Taptica International has total liabilities of US$67m and total assets of US$197m. Therefore its current liabilities are equivalent to approximately 34% of its total assets. Taptica International's ROCE is boosted somewhat by its middling amount of current liabilities.

What We Can Learn From Taptica International's ROCE

Despite this, it reports a high ROCE, and may be worth investigating further. There might be better investments than Taptica International 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 are like me, then you will not want to miss this free list of growing companies that insiders are 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.