How Do T&G Global Limited’s (NZSE:TGG) Returns On Capital Compare To Peers?

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Today we are going to look at T&G Global Limited (NZSE:TGG) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to 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.

What is Return On Capital Employed (ROCE)?

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. 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.'

How Do You Calculate Return On Capital Employed?

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 T&G Global:

0.032 = NZ$17m ÷ (NZ$998m - NZ$357m) (Based on the trailing twelve months to June 2018.)

So, T&G Global has an ROCE of 3.2%.

See our latest analysis for T&G Global

Is T&G Global's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. We can see T&G Global's ROCE is meaningfully below the Food industry average of 9.8%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how T&G Global compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.4% available in government bonds. There are potentially more appealing investments elsewhere.

Our data shows that T&G Global currently has an ROCE of 3.2%, compared to its ROCE of 2.2% 3 years ago. This makes us think the business might be improving.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. How cyclical is T&G Global? You can see for yourself by looking at this freegraph of past earnings, revenue and cash flow.

How T&G Global'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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

T&G Global has total assets of NZ$998m and current liabilities of NZ$357m. As a result, its current liabilities are equal to approximately 36% of its total assets. With a medium level of current liabilities boosting the ROCE a little, T&G Global's low ROCE is unappealing.

Our Take On T&G Global's ROCE

This company may not be the most attractive investment prospect. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this freelist of companies with modest (or no) debt, trading on a P/E below 20.

For those who like to find winning investments this freelist of growing companies with recent insider purchasing, could be just the ticket.

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.