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GuruFocus has detected 2 Warning Signs with Tesco PLC \$TSCDY.
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Tesco PLC (OTCPK:TSCDY)
ROC %
2.98% (As of Feb. 2017)

Return on capital measures how well a company generates cash flow relative to the capital it has invested in its business. It is also called Return on Invested Capital (ROIC). Tesco PLC's annualized return on capital (ROC) for the quarter that ended in Feb. 2017 was 2.98%.

As of today, Tesco PLC's weighted average cost Of capital is 4.60%. Tesco PLC's return on capital is 3.10% (calculated using TTM income statement data). Tesco PLC earns returns that do not match up to its cost of capital. It will destroy value as it grows.

Definition

Tesco PLC's annualized Return on Capital (ROC) for the fiscal year that ended in Feb. 2017 is calculated as:

 Return on Capital (ROC) (A: Feb. 2017 ) = NOPAT / Average Invested Capital = Oper. Inc.*(1-Tax Rate) / ( (Invested Capital (A: Feb. 2016 ) + Invested Capital (A: Feb. 2017 )) /2) = 1271.25 * ( 1 - 60% ) / ( (22045.7142857 + 15082.5) /2) = 508.5 / 18564.1071429 = 2.74 %
 Invested Capital (A: Feb. 2016 ) = Book Value of Debt + Book Value of Equity - Cash = Long-Term Debt + Short-Term Debt + Minority Interest + Total Equity - Cash = 15301.4285714 + 4037.14285714 + -14.2857142857 + 12322.8571429 - 9601.42857143 = 22045.7142857

 Invested Capital (A: Feb. 2017 ) = Book Value of Debt + Book Value of Equity - Cash = Long-Term Debt + Short-Term Debt + Minority Interest + Total Equity - Cash = 11791.25 + 3200 + -30 + 8047.5 - 7926.25 = 15082.5

Tesco PLC's annualized Return on Capital (ROC) for the quarter that ended in Feb. 2017 is calculated as:

 Return on Capital (ROC) (Q: Feb. 2017 ) = NOPAT / Average Invested Capital = Oper. Inc.*(1-Tax Rate) / ( (Invested Capital (Q: Aug. 2016 ) + Invested Capital (Q: Feb. 2017 )) /2) = 1255 * ( 1 - 63.51% ) / ( (15680.2096986 + 15082.5) /2) = 457.9495 / 15381.3548493 = 2.98 %

where

 Invested Capital (Q: Aug. 2016 ) = Book Value of Debt + Book Value of Equity - Cash = Long-Term Debt + Short-Term Debt + Minority Interest + Total Equity - Cash = 14587.1559633 + 3964.61336828 + -24.9017038008 + 7771.95281782 - 10618.6107471 = 15680.2096986

 Invested Capital (Q: Feb. 2017 ) = Book Value of Debt + Book Value of Equity - Cash = Long-Term Debt + Short-Term Debt + Minority Interest + Total Equity - Cash = 11791.25 + 3200 + -30 + 8047.5 - 7926.25 = 15082.5

Note: The Operating Income data used here is two times the semi-annual (Feb. 2017) operating income data.

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.

Explanation

Return on Capital measures how well a company generates cash flow relative to the capital it has invested in its business. It is also called Return on Invested Capital. The reason book values of debt and equity are used is because the book values are the capital the company received when issuing the debt or receiving the equity investments.

There are four key components to this definition. The first is the use of operating income rather than net income in the numerator. The second is the tax adjustment to this operating income, computed as a hypothetical tax based on an effective or marginal tax rate. The third is the use of book values for invested capital, rather than market values. The final is the timing difference; the capital invested is from the end of the prior year whereas the operating income is the current years number.

Why is Return on Capital important?

Because it costs money to raise capital. A firm that generates higher returns on investment than it costs the company to raise the capital needed for that investment is earning excess returns. A firm that expects to continue generating positive excess returns on new investments in the future will see its value increase as growth increases, whereas a firm that earns returns that do not match up to its cost of capital will destroy value as it grows.

As of today, Tesco PLC's weighted average cost Of capital is 4.60%. Tesco PLC's return on capital is 3.10% (calculated using TTM income statement data). Tesco PLC earns returns that do not match up to its cost of capital. It will destroy value as it grows.

Be Aware

Like ROE and ROA, ROC is calculated with only 12 months of data. Fluctuations in the companys earnings or business cycles can affect the ratio drastically. It is important to look at the ratio from a long term perspective.

Related Terms

Historical Data

* All numbers are in millions except for per share data and ratio. All numbers are in their local exchange's currency.

Tesco PLC Annual Data

 Feb08 Feb09 Feb10 Feb11 Feb12 Feb13 Feb14 Feb15 Feb16 Feb17 ROC 12.93 9.73 11.19 12.72 12.96 6.95 9.86 -25.13 8.33 2.74

Tesco PLC Semi-Annual Data

 Aug12 Feb13 Aug13 Feb14 Aug14 Feb15 Aug15 Feb16 Aug16 Feb17 ROC 12.61 0.70 10.64 8.46 2.55 -51.74 2.16 21.85 3.12 2.98
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