Today we’ll look at Akash Infra-Projects Limited (NSE:AKASH) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into 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. Finally, we’ll look at how its current liabilities affect 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. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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:
0.051 = ₹47m ÷ (₹1.4b – ₹499m) (Based on the trailing twelve months to September 2018.)
Therefore, Akash Infra-Projects has an ROCE of 5.1%.
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. In this analysis, Akash Infra-Projects’s ROCE appears meaningfully below the 13% average reported by the Construction industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. 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.
Akash Infra-Projects’s current ROCE of 5.1% is lower than 3 years ago, when the company reported a 9.0% ROCE. Therefore we wonder if the company is facing new headwinds.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Akash Infra-Projects has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.