<p class = "canvas-atom-canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Today, let's look at Tips Industries Limited (NSE: TIPSINDLTD) and think about its investment potential. Specifically, we will calculate its return on capital employed (ROCE), hoping to get a glimpse of the sector. "Data-reactid =" 27 "> Today, we are interested in Tips Industries Limited (NSE: TIPSINDLTD) and consider its investment potential.We will in particular calculate its return on capital employed (ROCE), in the hope to get an overview of the sector.

First, we will examine how we calculate ROCE. Secondly, we will examine its ROCE against similar companies. Finally, we will see how his current liabilities affect his ROCE.

What is return on capital used (ROCE)?

Mb (0) – sm Mt (0.8em) – sm "type =" text "content =" The ROCE is a measure of the annual income of a person. A business Tax benefit (its return), compared to the capital employed in the company.In general, companies with a higher ROCE are generally of better quality. a useful but imperfect indicator Michael Mauboussin, renowned investment researcher suggested that a high ROCE can indicate that a "dollar invested in the business generates a value of more than a dollar". "data-reactid =" 30 "> The ROCE is a measure of the annual pre-tax profit of a company (its return), in relative terms.A renowned researcher in the field of investments, Michael Mauboussin, indicated that a high return may indicate that a dollar invested in the capital invested in the business is usually of better quality.the business generates more than a dollar worth.

How do you calculate the return on capital employed?

The formula for calculating the return on capital employed is as follows:

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total Assets – Current Liabilities)"data-reactid =" 33 ">Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total Assets – Current Liabilities)

Or for tips industries:

0.063 = ₹ 98m ÷ (¥ 1.0b – ¥ 172m) (Based on the 12 months prior to September 2018.)

<p class = "canvas-atom-canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "So, Tips Industries has a ROCE of 6.3%. "data-reactid =" 36 "> So, Tips Industries has a ROCE of 6.3%.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = " See our latest analysis for Tips Industries "data-reactid =" 37 "> Check out our latest analysis for Tips Industries

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Want to participate in a short research study? Help us shape the future of investment tools and receive a $ 60 prize!"data-reactid =" 38 ">Do you want to participate in a short research study? Help us shape the future of investment tools and receive a $ 60 prize!

Does Tips Industries have a good return on investment?

When they make comparisons between similar companies, investors can find ROCE useful. The ROCE of Tips Industries appears to be well above the 2.7% average of the entertainment sector. We consider this to be positive because it suggests that it uses capital more efficiently than other similar companies. Regardless of the comparison between Tip Industries and its sector, its ROCE in absolute terms is low; especially compared to the ~ 7.6% available in government bonds. There are potentially more attractive investments elsewhere.

Tips Industries recorded a ROCE of 6.3%, an improvement over 3 years ago when the company was not profitable. This leads us to wonder if the company is improving.

NSEI: TIPSINDLTD Last Perf January 30th 19

More

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "It is important to remember that ROCE displays performance ROCE can be misleading for cyclical businesses because returns can look incredible in times of economic boom and terribly low in times of economic downturn because it only takes one year into account instead of taking into account the returns on a full cycle Tips Industries is cyclical, it might be wise to check this free graph of past revenues, revenues and cash flows. "data-reactid =" 54 "> It is important to keep in mind that ROCE shows past performance and that it is not necessarily predictive.This is due to the fact that ROCE only takes into account one year instead of taking into account the returns over a whole cycle.If Tips Industries is cyclical, it may be wise to check that. free graph of previous revenues, revenues and cash flows.

Current liabilities of Tips Industries and their impact on ROCE

Current liabilities are short-term bills and invoices that must be paid within 12 months or less. Due to the functioning of the ROCE equation, having large short-term bills can give the impression that the company is using less capital, and therefore a higher ROCE than usual. To remedy this, investors can check whether a company has high current liabilities relative to total assets.

Tips Industries has a total liability of 172 million rand and a total assets of 1.0 bt. As a result, its current liabilities are equivalent to approximately 17% of its total assets. This is not a high level of short-term liabilities, which would not greatly improve the return on investment.

The story continues

What we can learn from the ROCE of Tips Industries

<p class = "canvas-atom-canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "This is not a bad thing, but Tip Industries has low ROCE and may not be an attractive investment. Tips Industries may not be the best stock to buy. So take a look at this free list of interesting companies with strong earnings growth recently (and a P / E ratio below 20). "data-reactid =" 63 "> This is not a bad thing, but Tips Industries has a low ROCE and may not be an attractive investment, but note: Tips Industries may not be the best stock to buy. So take a look at this free list of interesting companies with strong earnings growth recently (and a P / E ratio below 20).

<p class = "canvas-canvas-text-canvas Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "I'd like better Tips Industries if I'm not. In the meantime, take a look at this free list of growing companies with a considerable number of recent insiders."data-reactid =" 64 "> I would like Tips Industries better if I see big insider purchases. In the meantime, take a look at this free list of growing companies with a considerable number of recent insiders.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "To help readers understand the past volatility of the financial market in the short term, our goal is to provide you with a long-term research analysis based solely on fundamental data. Note that our analysis does not take into account the latest price sensitive business announcements.

The author is an independent contributor and, at the time of publication, was not positioned in the actions mentioned. For errors that deserve correction, please contact the publisher at editorial-team@simplywallst.com.

"data-reactid =" 65 "> To help readers understand the short-term volatility of the financial market, we aim to provide you with a long-term research analysis based only on fundamental data. account of the latest price sensitive business announcements.

The author is an independent contributor and, at the time of publication, was not positioned in the actions mentioned. For errors that need to be corrected, please contact the publisher at editorial-team@simplywallst.com.