Today we'll evaluate Accord Synergy Limited (NSE:ACCORD) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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 Accord Synergy:
0.20 = ₹55m ÷ (₹380m - ₹109m) (Based on the trailing twelve months to March 2019.)
Therefore, Accord Synergy has an ROCE of 20%.
Is Accord Synergy's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Accord Synergy's ROCE is meaningfully better than the 13% average in the Commercial Services industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of where Accord Synergy sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Accord Synergy's current ROCE of 20% is lower than its ROCE in the past, which was 38%, 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how Accord Synergy'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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Accord Synergy is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do Accord Synergy's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Accord Synergy has total assets of ₹380m and current liabilities of ₹109m. Therefore its current liabilities are equivalent to approximately 29% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
The Bottom Line On Accord Synergy's ROCE
Overall, Accord Synergy has a decent ROCE and could be worthy of further research. Accord Synergy looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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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.