In This Article:
Today we'll look at Allcargo Logistics Limited (NSE:ALLCARGO) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the 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. Last but not least, we'll look at what impact its current liabilities have on 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. All else being equal, a better business will have a higher ROCE. 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?
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 Allcargo Logistics:
0.13 = ₹3.2b ÷ (₹39b - ₹15b) (Based on the trailing twelve months to June 2019.)
So, Allcargo Logistics has an ROCE of 13%.
View our latest analysis for Allcargo Logistics
Is Allcargo Logistics's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Allcargo Logistics's ROCE is meaningfully below the Logistics industry average of 17%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Allcargo Logistics stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
Allcargo Logistics's current ROCE of 13% is lower than its ROCE in the past, which was 19%, 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how Allcargo Logistics's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Allcargo Logistics.
Do Allcargo Logistics's Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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.