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Today we are going to look at Seeka Limited (NZSE:SEK) 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 of all, we’ll work out how to calculate ROCE. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. 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?
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 Seeka:
0.063 = NZ$14m ÷ (NZ$284m – NZ$60m) (Based on the trailing twelve months to June 2018.)
So, Seeka has an ROCE of 6.3%.
Check out our latest analysis for Seeka
Does Seeka Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In this analysis, Seeka’s ROCE appears meaningfully below the 10% average reported by the Food industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Aside from the industry comparison, Seeka’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
Seeka’s current ROCE of 6.3% is lower than 3 years ago, when the company reported a 8.7% ROCE. Therefore we wonder if the company is facing new headwinds.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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, after all, simply a snap shot of a single year. How cyclical is Seeka? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.