Why Calian Group Ltd.’s (TSE:CGY) Return On Capital Employed Is Impressive

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Today we'll look at Calian Group Ltd. (TSE:CGY) 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.

First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

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

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed 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 Calian Group:

0.19 = CA$22m ÷ (CA$175m - CA$63m) (Based on the trailing twelve months to March 2019.)

So, Calian Group has an ROCE of 19%.

View our latest analysis for Calian Group

Is Calian Group's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. Calian Group's ROCE appears to be substantially greater than the 8.8% average in the Commercial Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Calian Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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 Calian Group.

What Are Current Liabilities, And How Do They Affect Calian Group'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 counter this, investors can check if a company has high current liabilities relative to total assets.

Calian Group has total assets of CA$175m and current liabilities of CA$63m. Therefore its current liabilities are equivalent to approximately 36% of its total assets. Calian Group has a middling amount of current liabilities, increasing its ROCE somewhat.

The Bottom Line On Calian Group's ROCE

Calian Group's ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than Calian Group 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).

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.