In This Article:
Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!
Today we are going to look at Apollo Micro Systems Limited (NSE:APOLLO) to see whether it might be an attractive investment prospect. 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. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
How Do You Calculate Return On Capital Employed?
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 Apollo Micro Systems:
0.17 = ₹428m ÷ (₹4.5b – ₹1.6b) (Based on the trailing twelve months to December 2018.)
So, Apollo Micro Systems has an ROCE of 17%.
View our latest analysis for Apollo Micro Systems
Does Apollo Micro Systems Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, Apollo Micro Systems’s ROCE is meaningfully higher than the 12% average in the Aerospace & Defense industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Apollo Micro Systems compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Apollo Micro Systems’s current ROCE of 17% is lower than its ROCE in the past, which was 32%, 3 years ago. This makes us wonder if the business is facing new challenges.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. How cyclical is Apollo Micro Systems? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.