Why Intercede Group plc’s (LON:IGP) Return On Capital Employed Might Be A Concern

Simply Wall St

Mon, Jun 24, 2019, 1:33 AM

Today we are going to look at Intercede Group plc (LON:IGP) 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.

First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on 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. All else being equal, a better business will have a higher ROCE. 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.'

How Do You Calculate Return On Capital Employed?

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 Intercede Group:

0.0058 = UK£16k ÷ (UK£8.6m - UK£5.8m) (Based on the trailing twelve months to March 2019.)

Therefore, Intercede Group has an ROCE of 0.6%.

View our latest analysis for Intercede Group

Is Intercede Group's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Intercede Group's ROCE appears meaningfully below the 9.6% average reported by the Software industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Intercede Group stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.

Intercede Group reported an ROCE of 0.6% -- better than 3 years ago, when the company didn't make a profit. This makes us wonder if the company is improving.

AIM:IGP Past Revenue and Net Income, June 24th 2019

When considering this metric, keep in mind that it is backwards looking, and 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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Intercede Group.