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Here’s why Travelite Holdings Ltd.’s (SGX:BCZ) Returns On Capital Matters So Much

Simply Wall St

Today we are going to look at Travelite Holdings Ltd. (SGX:BCZ) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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?

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 Travelite Holdings:

0.0042 = S$164k ÷ (S$59m - S$20m) (Based on the trailing twelve months to March 2019.)

So, Travelite Holdings has an ROCE of 0.4%.

Check out our latest analysis for Travelite Holdings

Is Travelite Holdings's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Travelite Holdings's ROCE appears meaningfully below the 17% average reported by the Luxury industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Travelite Holdings compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.3% available in government bonds. There are potentially more appealing investments elsewhere.

We can see that , Travelite Holdings currently has an ROCE of 0.4% compared to its ROCE 3 years ago, which was 0.3%. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Travelite Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.

SGX:BCZ Past Revenue and Net Income, September 16th 2019

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. If Travelite Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

How Travelite 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.

Travelite Holdings has total assets of S$59m and current liabilities of S$20m. Therefore its current liabilities are equivalent to approximately 34% of its total assets. Travelite Holdings has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.

The Bottom Line On Travelite Holdings's ROCE

This company may not be the most attractive investment prospect. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.