In This Article:
Today we are going to look at Aptech Limited (NSE:APTECHT) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. In brief, it 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'.
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 Aptech:
0.072 = ₹203m ÷ (₹3.3b - ₹494m) (Based on the trailing twelve months to June 2019.)
So, Aptech has an ROCE of 7.2%.
View our latest analysis for Aptech
Is Aptech's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Aptech's ROCE appears to be substantially greater than the 4.9% average in the Consumer Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of how Aptech stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
We can see that , Aptech currently has an ROCE of 7.2% compared to its ROCE 3 years ago, which was 2.6%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Aptech's past growth compares to other companies.
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. ROCE is only a point-in-time measure. If Aptech is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do Aptech's Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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.