Today we'll evaluate Akg Exim Limited (NSE:AKG) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE 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 measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. 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 Akg Exim:

0.26 = ₹51m ÷ (₹577m - ₹382m) (Based on the trailing twelve months to March 2019.)

So, Akg Exim has an ROCE of 26%.

Check out our latest analysis for Akg Exim

Does Akg Exim Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, we find that Akg Exim's ROCE is meaningfully better than the 13% average in the Consumer Retailing industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, Akg Exim's ROCE currently appears to be excellent.

In our analysis, Akg Exim's ROCE appears to be 26%, compared to 3 years ago, when its ROCE was 14%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Akg Exim's past growth compares to other companies.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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 Akg Exim? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

How Akg Exim's Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.