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Today we are going to look at Apollo Sindoori Hotels Limited (NSE:APOLSINHOT) to see whether it might be an attractive investment prospect. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First, 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 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.’
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 Apollo Sindoori Hotels:
0.17 = ₹93m ÷ (₹773m – ₹236m) (Based on the trailing twelve months to March 2018.)
Therefore, Apollo Sindoori Hotels has an ROCE of 17%.
Does Apollo Sindoori Hotels Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Apollo Sindoori Hotels’s ROCE is meaningfully better than the 12% average in the Commercial Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Apollo Sindoori Hotels compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 Apollo Sindoori Hotels has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Apollo Sindoori Hotels’s Current Liabilities Impact 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Apollo Sindoori Hotels has total assets of ₹773m and current liabilities of ₹236m. As a result, its current liabilities are equal to approximately 31% of its total assets. With this level of current liabilities, Apollo Sindoori Hotels’s ROCE is boosted somewhat.
What We Can Learn From Apollo Sindoori Hotels’s ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. But note: Apollo Sindoori Hotels may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
I will like Apollo Sindoori Hotels better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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 firstname.lastname@example.org. 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.