Today we'll evaluate The TJX Companies, Inc. (NYSE:TJX) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is 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. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whitingsaysto 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 TJX Companies:

0.26 = US$4.3b ÷ (US$24b - US$7.7b) (Based on the trailing twelve months to November 2019.)

So, TJX Companies has an ROCE of 26%.

See our latest analysis for TJX Companies

Does TJX Companies Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. TJX Companies's ROCE appears to be substantially greater than the 11% average in the Specialty Retail industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, TJX Companies's ROCE currently appears to be excellent.

TJX Companies's current ROCE of 26% is lower than its ROCE in the past, which was 48%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how TJX Companies's ROCE compares to its industry. Click to see more on past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for TJX Companies.

TJX Companies's Current Liabilities And Their Impact On 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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

TJX Companies has total assets of US$24b and current liabilities of US$7.7b. Therefore its current liabilities are equivalent to approximately 32% of its total assets. A medium level of current liabilities boosts TJX Companies's ROCE somewhat.

The Bottom Line On TJX Companies's ROCE

Despite this, it reports a high ROCE, and may be worth investigating further. TJX Companies shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

I will like TJX Companies 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 ateditorial-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.