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# How Do TESGAS Spólka Akcyjna’s (WSE:TSG) Returns Compare To Its Industry?

Today we'll look at TESGAS Spólka Akcyjna (WSE:TSG) and reflect on its potential as an investment. 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. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

### Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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 TESGAS Spólka Akcyjna:

0.042 = zł3.2m ÷ (zł98m - zł22m) (Based on the trailing twelve months to December 2018.)

Therefore, TESGAS Spólka Akcyjna has an ROCE of 4.2%.

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### Does TESGAS Spólka Akcyjna Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see TESGAS Spólka Akcyjna's ROCE is meaningfully below the Gas Utilities industry average of 8.5%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how TESGAS Spólka Akcyjna compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.9% available in government bonds. There are potentially more appealing investments elsewhere.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is TESGAS Spólka Akcyjna? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

### Do TESGAS Spólka Akcyjna's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

TESGAS Spólka Akcyjna has total assets of zł98m and current liabilities of zł22m. As a result, its current liabilities are equal to approximately 22% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.

### The Bottom Line On TESGAS Spólka Akcyjna's ROCE

TESGAS Spólka Akcyjna has a poor ROCE, and there may be better investment prospects out there. You might be able to find a better investment than TESGAS Spólka Akcyjna. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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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.