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Today we are going to look at NIIT Limited (NSE:NIITLTD) to see whether it might be an attractive investment prospect. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding 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. 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.’
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 NIIT:
0.039 = ₹319m ÷ (₹15b – ₹5.2b) (Based on the trailing twelve months to December 2018.)
Therefore, NIIT has an ROCE of 3.9%.
Does NIIT Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, NIIT’s ROCE appears meaningfully below the 14% average reported by the IT industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how NIIT stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
Our data shows that NIIT currently has an ROCE of 3.9%, compared to its ROCE of 0.3% 3 years ago. This makes us think the business might be improving.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do NIIT’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 counter this, investors can check if a company has high current liabilities relative to total assets.
NIIT has total assets of ₹15b and current liabilities of ₹5.2b. As a result, its current liabilities are equal to approximately 34% of its total assets. With a medium level of current liabilities boosting the ROCE a little, NIIT’s low ROCE is unappealing.
Our Take On NIIT’s ROCE
This company may not be the most attractive investment prospect. Of course you might be able to find a better stock than NIIT. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like NIIT better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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 email@example.com.