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Today we are going to look at TCNS Clothing Co. Limited (NSE:TCNSBRANDS) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we’ll work out how to 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.
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. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
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 TCNS Clothing:
0.25 = ₹1.4b ÷ (₹7.0b – ₹1.5b) (Based on the trailing twelve months to September 2018.)
So, TCNS Clothing has an ROCE of 25%.
View our latest analysis for TCNS Clothing
Does TCNS Clothing Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. TCNS Clothing’s ROCE appears to be substantially greater than the 11% average in the Luxury 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. Independently of how TCNS Clothing compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
In our analysis, TCNS Clothing’s ROCE appears to be 25%, compared to 3 years ago, when its ROCE was 17%. This makes us wonder if the company is improving.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for TCNS Clothing.