Yahoo Finance Why We Like Tempur Sealy International, Inc.’s (NYSE:TPX) 14% Return On Capital Employed
Today we'll look at Tempur Sealy International, Inc. (NYSE:TPX) and reflect on its potential as an investment. 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. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding 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. In general, businesses with a higher ROCE are usually better quality. 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?
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 Tempur Sealy International:
0.14 = US$316m ÷ (US$3.1b - US$848m) (Based on the trailing twelve months to September 2019.)
So, Tempur Sealy International has an ROCE of 14%.
View our latest analysis for Tempur Sealy International
Does Tempur Sealy International Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Tempur Sealy International's ROCE appears to be around the 12% average of the Consumer Durables industry. Separate from Tempur Sealy International's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, Tempur Sealy International currently has an ROCE of 14%, less than the 20% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how Tempur Sealy International's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Tempur Sealy International.
What Are Current Liabilities, And How Do They Affect Tempur Sealy International's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
Tempur Sealy International has total assets of US$3.1b and current liabilities of US$848m. Therefore its current liabilities are equivalent to approximately 27% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
The Bottom Line On Tempur Sealy International's ROCE
This is good to see, and with a sound ROCE, Tempur Sealy International could be worth a closer look. Tempur Sealy International 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.
I will like Tempur Sealy International better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
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