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Today we are going to look at Tianli Education International Holdings Limited (HKG:1773) to see whether it might be an attractive investment prospect. 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.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its 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?
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 Tianli Education International Holdings:
0.069 = CN¥191m ÷ (CN¥3.8b - CN¥1.0b) (Based on the trailing twelve months to December 2018.)
Therefore, Tianli Education International Holdings has an ROCE of 6.9%.
Check out our latest analysis for Tianli Education International Holdings
Does Tianli Education International Holdings Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see Tianli Education International Holdings's ROCE is meaningfully below the Consumer Services industry average of 10%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Tianli Education International Holdings stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.
As we can see, Tianli Education International Holdings currently has an ROCE of 6.9% compared to its ROCE 3 years ago, which was 1.2%. This makes us think the business might be 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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Tianli Education International Holdings.