In This Article:
Today we are going to look at Archidply Industries Limited (NSE:ARCHIDPLY) 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. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the 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 Archidply Industries:
0.083 = ₹123m ÷ (₹2.9b - ₹1.4b) (Based on the trailing twelve months to June 2019.)
Therefore, Archidply Industries has an ROCE of 8.3%.
See our latest analysis for Archidply Industries
Is Archidply Industries's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see Archidply Industries's ROCE is meaningfully below the Forestry industry average of 13%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Archidply Industries compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.6% available in government bonds. There are potentially more appealing investments elsewhere.
Archidply Industries's current ROCE of 8.3% is lower than 3 years ago, when the company reported a 12% ROCE. So investors might consider if it has had issues recently. You can see in the image below how Archidply Industries'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 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. How cyclical is Archidply Industries? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Archidply Industries's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.