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Why We Like Town Sports International Holdings, Inc.’s (NASDAQ:CLUB) 13% Return On Capital Employed

Brandon Murphy

Today we are going to look at Town Sports International Holdings, Inc. (NASDAQ:CLUB) to see whether it might be an attractive investment prospect. 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, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.

Understanding 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. 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 Town Sports International Holdings:

0.13 = US$14m ÷ (US$262m – US$90m) (Based on the trailing twelve months to September 2018.)

So, Town Sports International Holdings has an ROCE of 13%.

View our latest analysis for Town Sports International Holdings

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Does Town Sports International Holdings Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Town Sports International Holdings’s ROCE is meaningfully higher than the 9.9% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Town Sports International Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Town Sports International Holdings reported an ROCE of 13% — better than 3 years ago, when the company didn’t make a profit. That suggests the business has returned to profitability.

NASDAQGM:CLUB Last Perf January 30th 19

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How Town Sports International Holdings’s Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Town Sports International Holdings has total liabilities of US$90m and total assets of US$262m. As a result, its current liabilities are equal to approximately 34% of its total assets. Town Sports International Holdings has a middling amount of current liabilities, increasing its ROCE somewhat.

Our Take On Town Sports International Holdings’s ROCE

With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. Of course you might be able to find a better stock than Town Sports International Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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 editorial-team@simplywallst.com.