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Is TKH Group N.V. (AMS:TWEKA) Investing Effectively In Its Business?

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Today we are going to look at TKH Group N.V. (AMS:TWEKA) to see whether it might be an attractive investment prospect. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the ‘return’ (pre-tax profit) a company generates from 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. 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’.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

Or for TKH Group:

0.14 = €107m ÷ (€1.4b – €443m) (Based on the trailing twelve months to June 2018.)

Therefore, TKH Group has an ROCE of 14%.

See our latest analysis for TKH Group

Is TKH Group’s ROCE Good?

One way to assess ROCE is to compare similar companies. It appears that TKH Group’s ROCE is fairly close to the Electrical industry average of 14%. Independently of how TKH Group compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

ENXTAM:TWEKA Last Perf February 4th 19
ENXTAM:TWEKA Last Perf February 4th 19

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. 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.

TKH Group’s Current Liabilities And Their Impact On Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.

TKH Group has total assets of €1.4b and current liabilities of €443m. Therefore its current liabilities are equivalent to approximately 32% of its total assets. TKH Group has a medium level of current liabilities, which would boost the ROCE.

Our Take On TKH Group’s ROCE

With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like TKH 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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.