Today we'll evaluate Textainer Group Holdings Limited (NYSE:TGH) 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.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding 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. 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.
So, How Do We Calculate ROCE?
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 Textainer Group Holdings:
0.047 = US$226m ÷ (US$5.1b - US$340m) (Based on the trailing twelve months to September 2019.)
Therefore, Textainer Group Holdings has an ROCE of 4.7%.
Does Textainer Group Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see Textainer Group Holdings's ROCE is meaningfully below the Trade Distributors industry average of 9.4%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how Textainer Group Holdings stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
Our data shows that Textainer Group Holdings currently has an ROCE of 4.7%, compared to its ROCE of 3.7% 3 years ago. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Textainer Group Holdings's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Textainer Group Holdings.
What Are Current Liabilities, And How Do They Affect Textainer Group Holdings's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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.
Textainer Group Holdings has total assets of US$5.1b and current liabilities of US$340m. As a result, its current liabilities are equal to approximately 6.6% of its total assets. Textainer Group Holdings has very few current liabilities, which have a minimal effect on its already low ROCE.
What We Can Learn From Textainer Group Holdings's ROCE
Nevertheless, there are potentially more attractive companies to invest in. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
I will like Textainer Group Holdings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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