In This Article:
Today we are going to look at Swelect Energy Systems Limited (NSE:SWELECTES) 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, 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 'return' (pre-tax profit) a company generates from capital employed in its 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.
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 Swelect Energy Systems:
0.0077 = ₹59m ÷ (₹10.0b - ₹2.3b) (Based on the trailing twelve months to June 2019.)
Therefore, Swelect Energy Systems has an ROCE of 0.8%.
Check out our latest analysis for Swelect Energy Systems
Is Swelect Energy Systems's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Swelect Energy Systems's ROCE is meaningfully below the Electrical industry average of 13%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Swelect Energy Systems compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.6% available in government bonds. Readers may wish to look for more rewarding investments.
Swelect Energy Systems's current ROCE of 0.8% is lower than 3 years ago, when the company reported a 1.1% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Swelect Energy Systems's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. How cyclical is Swelect Energy Systems? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.