Today we are going to look at TL Natural Gas Holdings Limited (HKG:8536) 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. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect 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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 TL Natural Gas Holdings:
0.14 = CN¥13m ÷ (CN¥103m - CN¥9.3m) (Based on the trailing twelve months to September 2019.)
So, TL Natural Gas Holdings has an ROCE of 14%.
Does TL Natural Gas Holdings Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. It appears that TL Natural Gas Holdings's ROCE is fairly close to the Specialty Retail industry average of 12%. Regardless of where TL Natural Gas Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
TL Natural Gas Holdings's current ROCE of 14% is lower than 3 years ago, when the company reported a 69% ROCE. Therefore we wonder if the company is facing new headwinds. You can see in the image below how TL Natural Gas Holdings's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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, after all, simply a snap shot of a single year. If TL Natural Gas Holdings is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do TL Natural Gas Holdings's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
TL Natural Gas Holdings has total assets of CN¥103m and current liabilities of CN¥9.3m. Therefore its current liabilities are equivalent to approximately 9.1% of its total assets. In addition to low current liabilities (making a negligible impact on ROCE), TL Natural Gas Holdings earns a sound return on capital employed.
What We Can Learn From TL Natural Gas Holdings's ROCE
This is good to see, and while better prospects may exist, TL Natural Gas Holdings seems worth researching further. TL Natural Gas Holdings shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
TL Natural Gas Holdings is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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