Why Allcargo Logistics Limited’s (NSE:ALLCARGO) Use Of Investor Capital Doesn’t Look Great

Today we'll evaluate Allcargo Logistics Limited (NSE:ALLCARGO) to determine whether it could have potential as an investment idea. 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. 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. 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 Allcargo Logistics:

0.10 = ₹3.0b ÷ (₹47b - ₹17b) (Based on the trailing twelve months to December 2019.)

Therefore, Allcargo Logistics has an ROCE of 10%.

See our latest analysis for Allcargo Logistics

Is Allcargo Logistics's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Allcargo Logistics's ROCE appears to be significantly below the 15% average in the Logistics industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Allcargo Logistics's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.

Allcargo Logistics's current ROCE of 10% is lower than 3 years ago, when the company reported a 17% ROCE. So investors might consider if it has had issues recently. You can see in the image below how Allcargo Logistics's ROCE compares to its industry. Click to see more on 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How Allcargo Logistics'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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Allcargo Logistics has total assets of ₹47b and current liabilities of ₹17b. Therefore its current liabilities are equivalent to approximately 36% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Allcargo Logistics's ROCE is concerning.

The Bottom Line On Allcargo Logistics's ROCE

So researching other companies may be a better use of your time. Of course, you might also be able to find a better stock than Allcargo Logistics. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.