Returns On Capital Signal Tricky Times Ahead For Accuracy Shipping (NSE:ACCURACY)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Accuracy Shipping (NSE:ACCURACY), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Accuracy Shipping, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.081 = ₹133m ÷ (₹3.1b - ₹1.4b) (Based on the trailing twelve months to December 2022).

Therefore, Accuracy Shipping has an ROCE of 8.1%. Ultimately, that's a low return and it under-performs the Logistics industry average of 14%.

See our latest analysis for Accuracy Shipping

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Accuracy Shipping, check out these free graphs here.

The Trend Of ROCE

On the surface, the trend of ROCE at Accuracy Shipping doesn't inspire confidence. To be more specific, ROCE has fallen from 43% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Accuracy Shipping's current liabilities are still rather high at 47% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Accuracy Shipping's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Accuracy Shipping. And long term investors must be optimistic going forward because the stock has returned a huge 885% to shareholders in the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Accuracy Shipping does have some risks, we noticed 3 warning signs (and 2 which are concerning) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.