Today we are going to look at ANI Integrated Services Limited (NSE:AISL) 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.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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'.
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 ANI Integrated Services:
0.17 = ₹66m ÷ (₹501m - ₹114m) (Based on the trailing twelve months to March 2019.)
So, ANI Integrated Services has an ROCE of 17%.
Is ANI Integrated Services's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, ANI Integrated Services's ROCE is meaningfully higher than the 14% average in the Professional Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where ANI Integrated Services sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
ANI Integrated Services's current ROCE of 17% is lower than 3 years ago, when the company reported a 43% ROCE. Therefore we wonder if the company is facing new headwinds. You can see in the image below how ANI Integrated Services's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if ANI Integrated Services has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect ANI Integrated Services's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
ANI Integrated Services has total liabilities of ₹114m and total assets of ₹501m. Therefore its current liabilities are equivalent to approximately 23% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
What We Can Learn From ANI Integrated Services's ROCE
Overall, ANI Integrated Services has a decent ROCE and could be worthy of further research. There might be better investments than ANI Integrated Services out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.