In This Article:
Today we are going to look at Talenom Oyj (HEL:TNOM) 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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 Talenom Oyj:
0.22 = €11m ÷ (€61m - €11m) (Based on the trailing twelve months to June 2019.)
Therefore, Talenom Oyj has an ROCE of 22%.
See our latest analysis for Talenom Oyj
Does Talenom Oyj Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Talenom Oyj's ROCE appears to be substantially greater than the 10% average in the Professional Services industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, Talenom Oyj's ROCE currently appears to be excellent.
In our analysis, Talenom Oyj's ROCE appears to be 22%, compared to 3 years ago, when its ROCE was 8.2%. This makes us think the business might be improving. You can see in the image below how Talenom Oyj's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Talenom Oyj.
Talenom Oyj's Current Liabilities And Their Impact On 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 the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.