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Today we are going to look at CyberTech Systems and Software Limited (NSE:CYBERTECH) to see whether it might be an attractive investment prospect. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. 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 CyberTech Systems and Software:
0.064 = ₹41m ÷ (₹1.3b – ₹503m) (Based on the trailing twelve months to December 2018.)
Therefore, CyberTech Systems and Software has an ROCE of 6.4%.
View our latest analysis for CyberTech Systems and Software
Is CyberTech Systems and Software’s ROCE Good?
One way to assess ROCE is to compare similar companies. In this analysis, CyberTech Systems and Software’s ROCE appears meaningfully below the 14% average reported by the IT industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how CyberTech Systems and Software stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
As we can see, CyberTech Systems and Software currently has an ROCE of 6.4% compared to its ROCE 3 years ago, which was 2.6%. This makes us think the business might be improving.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If CyberTech Systems and Software is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.