In This Article:
Today we'll evaluate Tianli Education International Holdings Limited (HKG:1773) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, 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.
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. All else being equal, a better business will have a higher ROCE. 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.
How Do You Calculate Return On Capital Employed?
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 Tianli Education International Holdings:
0.078 = CN¥262m ÷ (CN¥4.7b - CN¥1.4b) (Based on the trailing twelve months to December 2019.)
So, Tianli Education International Holdings has an ROCE of 7.8%.
See our latest analysis for Tianli Education International Holdings
Does Tianli Education International Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, Tianli Education International Holdings's ROCE appears to be significantly below the 11% average in the Consumer Services industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Tianli Education International Holdings'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, Tianli Education International Holdings currently has an ROCE of 7.8% compared to its ROCE 3 years ago, which was 4.4%. This makes us wonder if the company is improving. You can see in the image below how Tianli Education International Holdings's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Tianli Education International Holdings.