Today we are going to look at Accuracy Shipping Limited (NSE:ACCURACY) to see whether it might be an attractive investment prospect. 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. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting 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. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.
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 Accuracy Shipping:
0.36 = ₹190m ÷ (₹930m – ₹407m) (Based on the trailing twelve months to March 2018.)
So, Accuracy Shipping has an ROCE of 36%.
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Does Accuracy Shipping Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Accuracy Shipping’s ROCE is meaningfully higher than the 21% average in the Logistics industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Accuracy Shipping’s ROCE is currently very good.
Our data shows that Accuracy Shipping currently has an ROCE of 36%, compared to its ROCE of 26% 3 years ago. 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 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. If Accuracy Shipping is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Accuracy Shipping’s Current Liabilities And Their Impact On 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.
Accuracy Shipping has total assets of ₹930m and current liabilities of ₹407m. Therefore its current liabilities are equivalent to approximately 44% of its total assets. Accuracy Shipping’s ROCE is boosted somewhat by its middling amount of current liabilities.
Our Take On Accuracy Shipping’s ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
I will like Accuracy Shipping 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 firstname.lastname@example.org.