Yahoo Finance Is Tomra Systems ASA (OB:TOM) Creating Value For Shareholders?
Today we are going to look at Tomra Systems ASA (OB:TOM) 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. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting 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. 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.’
How Do You Calculate Return On Capital Employed?
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 Tomra Systems:
0.12 = øre1.1b ÷ (øre9.6b – øre651m) (Based on the trailing twelve months to December 2018.)
Therefore, Tomra Systems has an ROCE of 12%.
View our latest analysis for Tomra Systems
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Does Tomra Systems Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Tomra Systems’s ROCE is around the 10% average reported by the Commercial Services industry. Regardless of where Tomra Systems sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Tomra Systems.
Tomra Systems’s Current Liabilities And Their Impact On Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Tomra Systems has total liabilities of øre651m and total assets of øre9.6b. Therefore its current liabilities are equivalent to approximately 6.8% of its total assets. With low current liabilities, Tomra Systems’s decent ROCE looks that much more respectable.
The Bottom Line On Tomra Systems’s ROCE
This is good to see, and while better prospects may exist, Tomra Systems seems worth researching further. But note: Tomra Systems may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
