Yahoo Finance Shareholders Should Look Hard At TP Group plc’s (LON:TPG) 0.6% Return On Capital
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Today we'll evaluate TP Group plc (LON:TPG) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, 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.
Return On Capital Employed (ROCE): What is it?
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. Ultimately, it is a useful but imperfect metric. 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'.
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 TP Group:
0.0056 = UK£245k ÷ (UK£60m - UK£16m) (Based on the trailing twelve months to December 2018.)
So, TP Group has an ROCE of 0.6%.
See our latest analysis for TP Group
Does TP Group Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see TP Group's ROCE is meaningfully below the Machinery industry average of 13%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside TP Group's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
TP Group has an ROCE of 0.6%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. 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.
What Are Current Liabilities, And How Do They Affect TP Group's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.
TP Group has total liabilities of UK£16m and total assets of UK£60m. Therefore its current liabilities are equivalent to approximately 27% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.
The Bottom Line On TP Group's ROCE
While that is good to see, TP Group has a low ROCE and does not look attractive in this analysis. Of course, you might also be able to find a better stock than TP Group. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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. Thank you for reading.
