Today we are going to look at Time Interconnect Technology Limited (HKG:1729) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. 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?
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 Time Interconnect Technology:
0.28 = HK$153m ÷ (HK$891m - HK$341m) (Based on the trailing twelve months to March 2019.)
Therefore, Time Interconnect Technology has an ROCE of 28%.
Is Time Interconnect Technology's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Time Interconnect Technology's ROCE appears to be substantially greater than the 8.1% average in the Electrical industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, Time Interconnect Technology's ROCE currently appears to be excellent.
You can click on the image below to see (in greater detail) how Time Interconnect Technology'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. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. How cyclical is Time Interconnect Technology? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Time Interconnect Technology's Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Time Interconnect Technology has total liabilities of HK$341m and total assets of HK$891m. Therefore its current liabilities are equivalent to approximately 38% of its total assets. Time Interconnect Technology's ROCE is boosted somewhat by its middling amount of current liabilities.
Our Take On Time Interconnect Technology's ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. Time Interconnect Technology shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
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 email@example.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.