Today we’ll evaluate S.S. Infrastructure Development Consultants Limited (NSE:SSINFRA) 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 up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting 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. Ultimately, it is a useful but imperfect metric. 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 S.S. Infrastructure Development Consultants:
0.18 = ₹90m ÷ (₹574m – ₹78m) (Based on the trailing twelve months to March 2019.)
Therefore, S.S. Infrastructure Development Consultants has an ROCE of 18%.
Is S.S. Infrastructure Development Consultants’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. S.S. Infrastructure Development Consultants’s ROCE appears to be substantially greater than the 13% average in the Construction industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where S.S. Infrastructure Development Consultants sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
S.S. Infrastructure Development Consultants’s current ROCE of 18% is lower than 3 years ago, when the company reported a 38% ROCE. So investors might consider if it has had issues recently.
When considering this metric, keep in mind that it is backwards looking, and 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if S.S. Infrastructure Development Consultants has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do S.S. Infrastructure Development Consultants’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 the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
S.S. Infrastructure Development Consultants has total assets of ₹574m and current liabilities of ₹78m. Therefore its current liabilities are equivalent to approximately 14% of its total assets. Low current liabilities are not boosting the ROCE too much.
The Bottom Line On S.S. Infrastructure Development Consultants’s ROCE
With that in mind, S.S. Infrastructure Development Consultants’s ROCE appears pretty good. S.S. Infrastructure Development Consultants 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.
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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If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Thank you for reading.