Today we’ll look at Accuracy Shipping Limited (NSE:ACCURACY) 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.
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. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.
How Do You Calculate Return On Capital Employed?
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 Accuracy Shipping:
0.36 = ₹190m ÷ (₹930m – ₹407m) (Based on the trailing twelve months to March 2018.)
Therefore, Accuracy Shipping has an ROCE of 36%.
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Is Accuracy Shipping’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Accuracy Shipping’s ROCE is meaningfully better than the 21% average in the Logistics industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, Accuracy Shipping’s ROCE currently appears to be excellent.
As we can see, Accuracy Shipping currently has an ROCE of 36% compared to its ROCE 3 years ago, which was 26%. This makes us wonder if the company is improving.
When considering this metric, keep in mind that it is backwards looking, and 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. If Accuracy Shipping is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.