Why You Should Like 8K Miles Software Services Limited’s (NSE:8KMILES) ROCE

Today we are going to look at 8K Miles Software Services Limited (NSE:8KMILES) 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE 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. Generally speaking a higher ROCE is better. 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.'

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 8K Miles Software Services:

0.34 = ₹3.1b ÷ (₹10.0b - ₹904m) (Based on the trailing twelve months to December 2018.)

So, 8K Miles Software Services has an ROCE of 34%.

View our latest analysis for 8K Miles Software Services

Is 8K Miles Software Services's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. 8K Miles Software Services's ROCE appears to be substantially greater than the 11% average in the Software 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. Putting aside its position relative to its industry for now, in absolute terms, 8K Miles Software Services's ROCE is currently very good.

As we can see, 8K Miles Software Services currently has an ROCE of 34% compared to its ROCE 3 years ago, which was 26%. This makes us think about whether the company has been reinvesting shrewdly.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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 freegraph of past earnings, revenue and cash flow.

Do 8K Miles Software Services's Current Liabilities Skew 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

8K Miles Software Services has total assets of ₹10.0b and current liabilities of ₹904m. Therefore its current liabilities are equivalent to approximately 9.0% of its total assets. 8K Miles Software Services has low current liabilities, which have a negligible impact on its relatively good ROCE.

The Bottom Line On 8K Miles Software Services's ROCE

This should mark the company as worthy of further investigation. Of course you might be able to find a better stock than 8K Miles Software Services. So you may wish to see this freecollection 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 freelist of growing companies with considerable, recent, insider buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.