What Can We Make Of Rohas Tecnic Berhad’s (KLSE:TECNIC) High Return On Capital?

Today we'll look at Rohas Tecnic Berhad (KLSE:TECNIC) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. All else being equal, a better business will have a higher ROCE. 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.

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 Rohas Tecnic Berhad:

0.088 = RM34m ÷ (RM589m - RM202m) (Based on the trailing twelve months to December 2019.)

So, Rohas Tecnic Berhad has an ROCE of 8.8%.

View our latest analysis for Rohas Tecnic Berhad

Does Rohas Tecnic Berhad Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Rohas Tecnic Berhad's ROCE is meaningfully better than the 6.8% average in the Construction industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Aside from the industry comparison, Rohas Tecnic Berhad'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.

Rohas Tecnic Berhad's current ROCE of 8.8% is lower than its ROCE in the past, which was 18%, 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Rohas Tecnic Berhad's ROCE compares to its industry, and you can click it to see more detail on its past growth.

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 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 Rohas Tecnic Berhad.

What Are Current Liabilities, And How Do They Affect Rohas Tecnic Berhad's 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Rohas Tecnic Berhad has total assets of RM589m and current liabilities of RM202m. As a result, its current liabilities are equal to approximately 34% of its total assets. Rohas Tecnic Berhad's middling level of current liabilities have the effect of boosting its ROCE a bit.

Our Take On Rohas Tecnic Berhad's ROCE

With this level of liabilities and a mediocre ROCE, there are potentially better investments out there. 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).

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 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.