Is There More To TriMas Corporation (NASDAQ:TRS) Than Its 12% Returns On Capital?

Today we’ll evaluate TriMas Corporation (NASDAQ:TRS) 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.

Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

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. 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 TriMas:

0.12 = US$129m ÷ (US$1.2b – US$135m) (Based on the trailing twelve months to September 2019.)

Therefore, TriMas has an ROCE of 12%.

See our latest analysis for TriMas

Does TriMas Have A Good ROCE?

One way to assess ROCE is to compare similar companies. We can see TriMas’s ROCE is around the 11% average reported by the Machinery industry. Regardless of where TriMas sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Our data shows that TriMas currently has an ROCE of 12%, compared to its ROCE of 6.1% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how TriMas’s ROCE compares to its industry, and you can click it to see more detail on its past growth.

NasdaqGS:TRS Past Revenue and Net Income, January 22nd 2020
NasdaqGS:TRS Past Revenue and Net Income, January 22nd 2020

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for TriMas.

TriMas’s Current Liabilities And Their Impact On Its 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

TriMas has total liabilities of US$135m and total assets of US$1.2b. Therefore its current liabilities are equivalent to approximately 11% of its total assets. Low current liabilities are not boosting the ROCE too much.

The Bottom Line On TriMas’s ROCE

With that in mind, TriMas’s ROCE appears pretty good. There might be better investments than TriMas 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.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.

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. Thank you for reading.