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Today we are going to look at Apex Frozen Foods Limited (NSE:APEX) 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.
Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.
What is 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. 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 Apex Frozen Foods:
0.27 = ₹1.0b ÷ (₹5.0b – ₹1.6b) (Based on the trailing twelve months to December 2018.)
So, Apex Frozen Foods has an ROCE of 27%.
Check out our latest analysis for Apex Frozen Foods
Is Apex Frozen Foods’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Apex Frozen Foods’s ROCE appears to be substantially greater than the 13% average in the Food industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Apex Frozen Foods’s ROCE in absolute terms currently looks quite high.
Apex Frozen Foods’s current ROCE of 27% is lower than its ROCE in the past, which was 45%, 3 years ago. Therefore we wonder if the company is facing new headwinds.
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 only a point-in-time measure. If Apex Frozen Foods is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Apex Frozen Foods’s Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.