Yahoo Finance Are TalkTalk Telecom Group PLC’s (LON:TALK) Returns On Investment Worth Your While?
Today we'll look at TalkTalk Telecom Group PLC (LON:TALK) and reflect on its potential as an investment. 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, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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.
So, How Do We Calculate ROCE?
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 TalkTalk Telecom Group:
0.096 = UK£120m ÷ (UK£1.8b - UK£550m) (Based on the trailing twelve months to September 2019.)
So, TalkTalk Telecom Group has an ROCE of 9.6%.
Check out our latest analysis for TalkTalk Telecom Group
Is TalkTalk Telecom Group's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. It appears that TalkTalk Telecom Group's ROCE is fairly close to the Telecom industry average of 8.4%. Separate from TalkTalk Telecom Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, TalkTalk Telecom Group currently has an ROCE of 9.6%, less than the 22% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how TalkTalk Telecom Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. 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 TalkTalk Telecom Group's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
TalkTalk Telecom Group has total assets of UK£1.8b and current liabilities of UK£550m. Therefore its current liabilities are equivalent to approximately 30% of its total assets. TalkTalk Telecom Group has a middling amount of current liabilities, increasing its ROCE somewhat.
The Bottom Line On TalkTalk Telecom Group's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. There might be better investments than TalkTalk Telecom Group out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
TalkTalk Telecom Group 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 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.
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