Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today we’ll evaluate Husys Consulting Limited (NSE:HUSYSLTD) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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?
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 Husys Consulting:
0.20 = ₹16m ÷ (₹89m – ₹9.5m) (Based on the trailing twelve months to March 2018.)
So, Husys Consulting has an ROCE of 20%.
Check out our latest analysis for Husys Consulting
Is Husys Consulting’s ROCE Good?
One way to assess ROCE is to compare similar companies. In our analysis, Husys Consulting’s ROCE is meaningfully higher than the 10% average in the Professional Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Husys Consulting’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. You can check if Husys Consulting has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Husys Consulting’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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.