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# Here’s What Excelpoint Technology Ltd’s (SGX:BDF) ROCE Can Tell Us

Today we’ll look at Excelpoint Technology Ltd (SGX:BDF) and reflect on its potential as an investment. 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 up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

### What is Return On Capital Employed (ROCE)?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, ROCE is a useful tool, but it is not without drawbacks. 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’.

### So, How Do We Calculate ROCE?

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 Excelpoint Technology:

0.21 = US\$14m ÷ (US\$457m – US\$381m) (Based on the trailing twelve months to September 2018.)

So, Excelpoint Technology has an ROCE of 21%.

### Does Excelpoint Technology Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Excelpoint Technology’s ROCE appears to be substantially greater than the 9.1% average in the Electronic 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, Excelpoint Technology’s ROCE is currently very good.

As we can see, Excelpoint Technology currently has an ROCE of 21% compared to its ROCE 3 years ago, which was 9.0%. This makes us think about whether the company has been reinvesting shrewdly.

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 Excelpoint Technology? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

### Do Excelpoint Technology’s Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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) unfairly boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Excelpoint Technology has total assets of US\$457m and current liabilities of US\$381m. As a result, its current liabilities are equal to approximately 83% of its total assets. Excelpoint Technology boasts an attractive ROCE, even after considering the boost from high current liabilities.

### The Bottom Line On Excelpoint Technology’s ROCE

In my book, this business could be worthy of further research. You might be able to find a better buy than Excelpoint Technology. 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).

Of course Excelpoint Technology may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.

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.