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Today we are going to look at Ten Entertainment Group plc (LON:TEG) to see whether it might be an attractive investment prospect. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we’ll look at what ROCE is and how we calculate it. 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.
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. In general, businesses with a higher ROCE are usually better quality. 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 Ten Entertainment Group:
0.24 = UK£14m ÷ (UK£80m – UK£24m) (Based on the trailing twelve months to July 2018.)
So, Ten Entertainment Group has an ROCE of 24%.
Check out our latest analysis for Ten Entertainment Group
Is Ten Entertainment Group’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Ten Entertainment Group’s ROCE is meaningfully better than the 8.5% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Ten Entertainment Group’s ROCE is currently very good.
In our analysis, Ten Entertainment Group’s ROCE appears to be 24%, compared to 3 years ago, when its ROCE was 12%. This makes us wonder if the company is improving.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Ten Entertainment Group.