How Do Tianli Education International Holdings Limited’s (HKG:1773) Returns Compare To Its Industry?
Today we'll evaluate Tianli Education International Holdings Limited (HKG:1773) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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'.
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 Tianli Education International Holdings:
0.069 = CN¥219m ÷ (CN¥4.6b - CN¥1.4b) (Based on the trailing twelve months to June 2019.)
Therefore, Tianli Education International Holdings has an ROCE of 6.9%.
Check out our latest analysis for Tianli Education International Holdings
Is Tianli Education International Holdings's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Tianli Education International Holdings's ROCE appears to be significantly below the 10% average in the Consumer Services industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Tianli Education International Holdings stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
In our analysis, Tianli Education International Holdings's ROCE appears to be 6.9%, compared to 3 years ago, when its ROCE was 3.0%. This makes us think the business might be improving. The image below shows how Tianli Education International Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Tianli Education International Holdings.
Do Tianli Education International Holdings's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Tianli Education International Holdings has total assets of CN¥4.6b and current liabilities of CN¥1.4b. Therefore its current liabilities are equivalent to approximately 31% of its total assets. Tianli Education International Holdings's ROCE is improved somewhat by its moderate amount of current liabilities.
Our Take On Tianli Education International Holdings's ROCE
With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. You might be able to find a better investment than Tianli Education International Holdings. 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).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
