In This Article:
Today we'll look at Tomra Systems ASA (OB:TOM) and reflect on its potential as an investment. 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is 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. 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 Tomra Systems:
0.13 = kr1.2b ÷ (kr11b - kr1.4b) (Based on the trailing twelve months to June 2019.)
So, Tomra Systems has an ROCE of 13%.
See our latest analysis for Tomra Systems
Is Tomra Systems's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Tomra Systems's ROCE is meaningfully higher than the 8.9% average in the Commercial Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Tomra Systems sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Tomra Systems's current ROCE of 13% is lower than 3 years ago, when the company reported a 18% ROCE. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Tomra Systems's past growth compares to other companies.
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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.