Today we'll look at Team17 Group PLC (LON:TM17) 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding 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. Ultimately, it is a useful but imperfect metric. 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 Team17 Group:
0.25 = UK£19m ÷ (UK£85m - UK£10m) (Based on the trailing twelve months to June 2019.)
So, Team17 Group has an ROCE of 25%.
Is Team17 Group's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Team17 Group's ROCE appears to be substantially greater than the 6.2% average in the Entertainment industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Team17 Group's ROCE currently appears to be excellent.
In our analysis, Team17 Group's ROCE appears to be 25%, compared to 3 years ago, when its ROCE was 17%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Team17 Group's past growth compares to other companies.
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 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 Team17 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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Team17 Group has total liabilities of UK£10m and total assets of UK£85m. As a result, its current liabilities are equal to approximately 12% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
Our Take On Team17 Group's ROCE
, Team17 Group 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.
I will like Team17 Group better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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