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Today we’ll look at TeamLease Services Limited (NSE:TEAMLEASE) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, 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. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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 TeamLease Services:

0.14 = ₹841m ÷ (₹11b – ₹4.8b) (Based on the trailing twelve months to June 2019.)

So, TeamLease Services has an ROCE of 14%.

See our latest analysis for TeamLease Services

Does TeamLease Services Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, TeamLease Services’s ROCE appears to be around the 14% average of the Professional Services industry. Setting aside the industry comparison for now, TeamLease Services’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

Our data shows that TeamLease Services currently has an ROCE of 14%, compared to its ROCE of 8.0% 3 years ago. This makes us think the business might be improving.

NSEI:TEAMLEASE Past Revenue and Net Income, August 30th 2019
NSEI:TEAMLEASE Past Revenue and Net Income, August 30th 2019

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for TeamLease Services.

How TeamLease Services’s Current Liabilities Impact 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. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

TeamLease Services has total liabilities of ₹4.8b and total assets of ₹11b. As a result, its current liabilities are equal to approximately 44% of its total assets. TeamLease Services’s ROCE is improved somewhat by its moderate amount of current liabilities.

What We Can Learn From TeamLease Services’s ROCE

Despite this, its ROCE is still mediocre, and you may find more appealing investments elsewhere. But note: make sure you look for a great company, not just the first idea you come across. 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 are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.