In This Article:
Today we'll look at Rectifier Technologies Limited (ASX:RFT) and reflect on its potential as an investment. 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. 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. All else being equal, a better business will have a higher ROCE. 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?
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 Rectifier Technologies:
0.21 = AU$1.8m ÷ (AU$12m - AU$3.9m) (Based on the trailing twelve months to December 2018.)
Therefore, Rectifier Technologies has an ROCE of 21%.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
View our latest analysis for Rectifier Technologies
Does Rectifier Technologies Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Rectifier Technologies's ROCE is meaningfully better than the 12% average in the Electrical 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, Rectifier Technologies's ROCE currently appears to be excellent.
Our data shows that Rectifier Technologies currently has an ROCE of 21%, compared to its ROCE of 16% 3 years ago. This makes us wonder if the company is improving.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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, after all, simply a snap shot of a single year. If Rectifier Technologies is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.