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# Here’s why Trifast plc’s (LON:TRI) Returns On Capital Matters So Much

Today we’ll evaluate Trifast plc (LON:TRI) to determine whether it could have potential as an investment idea. 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 of all, we’ll work out how to 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.

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

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. 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’.

### How Do You Calculate Return On Capital Employed?

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 Trifast:

0.14 = UK£19m ÷ (UK£203m – UK£74m) (Based on the trailing twelve months to September 2018.)

Therefore, Trifast has an ROCE of 14%.

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### Is Trifast’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. We can see Trifast’s ROCE is around the 13% average reported by the Machinery industry. Regardless of where Trifast sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Trifast.

### What Are Current Liabilities, And How Do They Affect Trifast’s ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Trifast has total liabilities of UK£74m and total assets of UK£203m. Therefore its current liabilities are equivalent to approximately 36% of its total assets. With this level of current liabilities, Trifast’s ROCE is boosted somewhat.

### Our Take On Trifast’s ROCE

Trifast’s ROCE does look good, but the level of current liabilities also contribute to that. You might be able to find a better buy than Trifast. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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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.