Today we'll evaluate Accuracy Shipping Limited (NSE:ACCURACY) to determine whether it could have potential as an investment idea. 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. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 Accuracy Shipping:
0.16 = ₹169m ÷ (₹1.6b - ₹587m) (Based on the trailing twelve months to March 2019.)
Therefore, Accuracy Shipping has an ROCE of 16%.
See our latest analysis for Accuracy Shipping
Is Accuracy Shipping's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Accuracy Shipping's ROCE appears to be around the 16% average of the Logistics industry. Separate from Accuracy Shipping's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that , Accuracy Shipping currently has an ROCE of 16%, less than the 24% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how Accuracy Shipping's ROCE compares to its industry. Click to see more on 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, 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.
Do Accuracy Shipping's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.