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Today we'll look at Tootsie Roll Industries, Inc. (NYSE:TR) and reflect on its potential as an investment. 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. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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 Tootsie Roll Industries:
0.081 = US$72m ÷ (US$941m - US$53m) (Based on the trailing twelve months to March 2019.)
Therefore, Tootsie Roll Industries has an ROCE of 8.1%.
Is Tootsie Roll Industries's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Tootsie Roll Industries's ROCE is around the 8.2% average reported by the Food industry. Setting aside the industry comparison for now, Tootsie Roll Industries's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
We can see that , Tootsie Roll Industries currently has an ROCE of 8.1%, less than the 11% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how Tootsie Roll Industries's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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 only a point-in-time measure. You can check if Tootsie Roll Industries has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Tootsie Roll Industries's Current Liabilities And Their Impact On Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Tootsie Roll Industries has total liabilities of US$53m and total assets of US$941m. Therefore its current liabilities are equivalent to approximately 5.6% of its total assets. With low levels of current liabilities, at least Tootsie Roll Industries's mediocre ROCE is not unduly boosted.
Our Take On Tootsie Roll Industries's ROCE
If performance improves, then Tootsie Roll Industries may be an OK investment, especially at the right valuation. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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 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. Thank you for reading.