Today we are going to look at Mindpool Technologies Limited (NSE:MINDPOOL) 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
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.'
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 Mindpool Technologies:
0.097 = ₹14m ÷ (₹177m - ₹29m) (Based on the trailing twelve months to March 2019.)
Therefore, Mindpool Technologies has an ROCE of 9.7%.
See our latest analysis for Mindpool Technologies
Does Mindpool Technologies Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Mindpool Technologies's ROCE appears meaningfully below the 14% average reported by the IT industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Mindpool Technologies's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
We can see that , Mindpool Technologies currently has an ROCE of 9.7% compared to its ROCE 3 years ago, which was 4.7%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Mindpool Technologies's ROCE compares to its industry. Click to see more on past growth.
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. If Mindpool Technologies is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.