Today we are going to look at HOV Services Limited (NSE:HOVS) 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect 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. 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.'

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 HOV Services:

0.0011 = ₹6.9m ÷ (₹6.1b - ₹41m) (Based on the trailing twelve months to March 2019.)

So, HOV Services has an ROCE of 0.1%.

See our latest analysis for HOV Services

Is HOV Services's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see HOV Services's ROCE is meaningfully below the IT industry average of 14%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside HOV Services's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.

We can see that , HOV Services currently has an ROCE of 0.1%, less than the 0.2% it reported 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how HOV Services's past growth compares to other companies.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. How cyclical is HOV Services? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.