Today we’ll evaluate Intense Technologies Limited (NSE:INTENTECH) to determine whether it could have potential as an investment idea. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its 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. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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 Intense Technologies:
0.058 = ₹26m ÷ (₹547m – ₹89m) (Based on the trailing twelve months to March 2018.)
So, Intense Technologies has an ROCE of 5.8%.
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Does Intense Technologies Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Intense Technologies’s ROCE is meaningfully below the Software industry average of 10%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Intense Technologies stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Intense Technologies? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Intense Technologies’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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Intense Technologies has total assets of ₹547m and current liabilities of ₹89m. As a result, its current liabilities are equal to approximately 16% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
Our Take On Intense Technologies’s ROCE
While that is good to see, Intense Technologies has a low ROCE and does not look attractive in this analysis. You might be able to find a better buy than Intense Technologies. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.