Today we’ll look at 8K Miles Software Services Limited (NSE:8KMILES) and reflect on its potential as an investment. 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.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
Understanding 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. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.
How Do You Calculate Return On Capital Employed?
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 8K Miles Software Services:
0.12 = ₹1.0b ÷ (₹10.0b – ₹1.7b) (Based on the trailing twelve months to March 2019.)
So, 8K Miles Software Services has an ROCE of 12%.
Does 8K Miles Software Services Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, 8K Miles Software Services’s ROCE appears to be around the 11% average of the Software industry. Setting aside the industry comparison for now, 8K Miles Software Services’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
8K Miles Software Services’s current ROCE of 12% is lower than 3 years ago, when the company reported a 25% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how 8K Miles Software Services’s past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. How cyclical is 8K Miles Software Services? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How 8K Miles Software Services’s Current Liabilities Impact 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.
8K Miles Software Services has current liabilities of ₹1.7b and total assets of ₹10.0b. Therefore its current liabilities are equivalent to approximately 17% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
What We Can Learn From 8K Miles Software Services’s ROCE
That said, 8K Miles Software Services’s ROCE is mediocre, there may be more attractive investments around. Of course, you might also be able to find a better stock than 8K Miles Software Services. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like 8K Miles Software Services better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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