Today we'll look at TIL Enviro Limited (HKG:1790) 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.

First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. 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?

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 TIL Enviro:

0.084 = HK$153m ÷ (HK$2.0b - HK$199m) (Based on the trailing twelve months to June 2019.)

Therefore, TIL Enviro has an ROCE of 8.4%.

See our latest analysis for TIL Enviro

Is TIL Enviro's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, TIL Enviro's ROCE appears to be around the 9.9% average of the Commercial Services industry. Aside from the industry comparison, TIL Enviro's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

We can see that , TIL Enviro currently has an ROCE of 8.4%, less than the 13% it reported 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how TIL Enviro's ROCE compares to its industry. Click to see more on past growth.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. How cyclical is TIL Enviro? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Do TIL Enviro's Current Liabilities Skew 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. 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.