Today we are going to look at 3P Learning Limited (ASX:3PL) to see whether it might be an attractive investment prospect. 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

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 3P Learning:

0.30 = AU$8.6m ÷ (AU$62m - AU$33m) (Based on the trailing twelve months to June 2019.)

Therefore, 3P Learning has an ROCE of 30%.

See our latest analysis for 3P Learning

Does 3P Learning Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. 3P Learning's ROCE appears to be substantially greater than the 9.2% average in the Consumer Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, 3P Learning's ROCE in absolute terms currently looks quite high.

We can see that, 3P Learning currently has an ROCE of 30% compared to its ROCE 3 years ago, which was 14%. This makes us wonder if the company is improving. You can see in the image below how 3P Learning's ROCE compares to its industry. Click to see more on past growth.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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, 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 3P Learning.

How 3P Learning's Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

3P Learning has total liabilities of AU$33m and total assets of AU$62m. As a result, its current liabilities are equal to approximately 54% of its total assets. 3P Learning boasts an attractive ROCE, even after considering the boost from high current liabilities.

The Bottom Line On 3P Learning's ROCE

So to us, the company is potentially worth investigating further. 3P Learning looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

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.