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Today we’ll look at Ace Integrated Solutions Limited (NSE:ACEINTEG) and reflect on its potential as an investment. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
What is 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. 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 Ace Integrated Solutions:
0.13 = ₹22m ÷ (₹234m – ₹63m) (Based on the trailing twelve months to September 2018.)
So, Ace Integrated Solutions has an ROCE of 13%.
See our latest analysis for Ace Integrated Solutions
Is Ace Integrated Solutions’s ROCE Good?
One way to assess ROCE is to compare similar companies. It appears that Ace Integrated Solutions’s ROCE is fairly close to the IT industry average of 13%. Setting aside the industry comparison for now, Ace Integrated Solutions’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
As we can see, Ace Integrated Solutions currently has an ROCE of 13%, less than the 37% it reported 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. 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. If Ace Integrated Solutions is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.