Why We Like Tinexta S.p.A.’s (BIT:TNXT) 17% Return On Capital Employed

Simply Wall St

Today we'll look at Tinexta S.p.A. (BIT:TNXT) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the 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.

Understanding Return On Capital Employed (ROCE)

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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 Tinexta:

0.17 = €51m ÷ (€441m - €139m) (Based on the trailing twelve months to September 2019.)

Therefore, Tinexta has an ROCE of 17%.

Check out our latest analysis for Tinexta

Is Tinexta's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Tinexta's ROCE is meaningfully higher than the 14% average in the Professional Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Tinexta compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

We can see that, Tinexta currently has an ROCE of 17% compared to its ROCE 3 years ago, which was 8.1%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Tinexta's past growth compares to other companies.

BIT:TNXT Past Revenue and Net Income, January 27th 2020
BIT:TNXT Past Revenue and Net Income, January 27th 2020

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Tinexta's Current Liabilities And Their Impact On Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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.

Tinexta has total assets of €441m and current liabilities of €139m. Therefore its current liabilities are equivalent to approximately 32% of its total assets. Tinexta has a middling amount of current liabilities, increasing its ROCE somewhat.

What We Can Learn From Tinexta's ROCE

With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. Tinexta 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.