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Today we’ll look at Ultra Wiring Connectivity System Limited (NSE:UWCSL) and reflect on its potential as an investment. 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. 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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’.
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 Ultra Wiring Connectivity System:
0.19 = ₹17m ÷ (₹184m – ₹92m) (Based on the trailing twelve months to February 2018.)
So, Ultra Wiring Connectivity System has an ROCE of 19%.
Check out our latest analysis for Ultra Wiring Connectivity System
Is Ultra Wiring Connectivity System’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. It appears that Ultra Wiring Connectivity System’s ROCE is fairly close to the Auto Components industry average of 17%. Regardless of where Ultra Wiring Connectivity System sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
In our analysis, Ultra Wiring Connectivity System’s ROCE appears to be 19%, compared to 3 years ago, when its ROCE was 14%. This makes us think the business might be improving.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 Ultra Wiring Connectivity System is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.