In This Article:
Today we'll evaluate Taylor Devices, Inc. (NASDAQ:TAYD) 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.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
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'.
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 Taylor Devices:
0.083 = US$3.0m ÷ (US$41m - US$4.9m) (Based on the trailing twelve months to May 2019.)
So, Taylor Devices has an ROCE of 8.3%.
View our latest analysis for Taylor Devices
Does Taylor Devices Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Taylor Devices's ROCE appears meaningfully below the 12% average reported by the Machinery industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Separate from how Taylor Devices stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
Taylor Devices's current ROCE of 8.3% is lower than its ROCE in the past, which was 19%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Taylor Devices'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. 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. You can check if Taylor Devices has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.