Today we’ll look at Tootsie Roll Industries, Inc. (NYSE:TR) 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. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting its ROCE.
What is 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. 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.’
How Do You Calculate Return On Capital Employed?
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 Tootsie Roll Industries:
0.08 = US$82m ÷ (US$961m – US$75m) (Based on the trailing twelve months to September 2018.)
So, Tootsie Roll Industries has an ROCE of 8.0%.
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Does Tootsie Roll Industries Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Tootsie Roll Industries’s ROCE appears to be around the 8.6% average of the Food industry. Aside from the industry comparison, 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.
Tootsie Roll Industries’s current ROCE of 8.0% is lower than its ROCE in the past, which was 11%, 3 years ago. This makes us wonder if the business is facing new challenges.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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.
How Tootsie Roll Industries’s Current Liabilities Impact 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 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.
Tootsie Roll Industries has total assets of US$961m and current liabilities of US$75m. As a result, its current liabilities are equal to approximately 7.8% 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
Based on this information, Tootsie Roll Industries appears to be a mediocre business. 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.