Today we’ll evaluate TCNS Clothing Co. Limited (NSE:TCNSBRANDS) 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.
First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the 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 TCNS Clothing:
0.16 = ₹1.5b ÷ (₹12b – ₹2.0b) (Based on the trailing twelve months to December 2019.)
Therefore, TCNS Clothing has an ROCE of 16%.
Is TCNS Clothing’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that TCNS Clothing’s ROCE is meaningfully better than the 12% average in the Luxury industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where TCNS Clothing sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
TCNS Clothing’s current ROCE of 16% is lower than 3 years ago, when the company reported a 26% ROCE. Therefore we wonder if the company is facing new headwinds. The image below shows how TCNS Clothing’s ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for TCNS Clothing.
What Are Current Liabilities, And How Do They Affect TCNS Clothing’s ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
TCNS Clothing has total assets of ₹12b and current liabilities of ₹2.0b. As a result, its current liabilities are equal to approximately 17% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On TCNS Clothing’s ROCE
Overall, TCNS Clothing has a decent ROCE and could be worthy of further research. TCNS Clothing looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
If you spot an error that warrants correction, please contact the editor at email@example.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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