Today we are going to look at Akash Infra-Projects Limited (NSE:AKASH) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First up, we'll look at what ROCE is and how we calculate it. 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 measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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?
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 Akash Infra-Projects:
0.045 = ₹41m ÷ (₹1.5b - ₹554m) (Based on the trailing twelve months to March 2019.)
So, Akash Infra-Projects has an ROCE of 4.5%.
View our latest analysis for Akash Infra-Projects
Is Akash Infra-Projects's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Akash Infra-Projects's ROCE appears to be significantly below the 14% average in the Construction industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Akash Infra-Projects compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.6% available in government bonds. It is likely that there are more attractive prospects out there.
The image below shows how Akash Infra-Projects's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. How cyclical is Akash Infra-Projects? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Akash Infra-Projects's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.