Today we are going to look at Apex Frozen Foods Limited (NSE:APEX) 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.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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?
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 Apex Frozen Foods:
0.19 = ₹756m ÷ (₹5.9b – ₹1.9b) (Based on the trailing twelve months to December 2019.)
So, Apex Frozen Foods has an ROCE of 19%.
Is Apex Frozen Foods’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Apex Frozen Foods’s ROCE is meaningfully better than the 11% average in the Food industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Apex Frozen Foods’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Apex Frozen Foods’s current ROCE of 19% is lower than 3 years ago, when the company reported a 33% ROCE. So investors might consider if it has had issues recently. The image below shows how Apex Frozen Foods’s ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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 only a point-in-time measure. You can check if Apex Frozen Foods has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Apex Frozen Foods’s Current Liabilities Skew Its ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Apex Frozen Foods has current liabilities of ₹1.9b and total assets of ₹5.9b. Therefore its current liabilities are equivalent to approximately 32% of its total assets. Apex Frozen Foods has a middling amount of current liabilities, increasing its ROCE somewhat.
Our Take On Apex Frozen Foods’s ROCE
Apex Frozen Foods’s ROCE does look good, but the level of current liabilities also contribute to that. Apex Frozen Foods shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
I will like Apex Frozen Foods better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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