Today we'll look at ICS Global Limited (ASX:ICS) and reflect on its potential as an investment. 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. 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.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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 ICS Global:
0.19 = AU$1.3m ÷ (AU$10m - AU$3.4m) (Based on the trailing twelve months to December 2019.)
Therefore, ICS Global has an ROCE of 19%.
Does ICS Global Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, ICS Global's ROCE is meaningfully higher than the 8.8% average in the Healthcare 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. Putting aside its position relative to its industry for now, in absolute terms, ICS Global's ROCE is currently very good.
You can see in the image below how ICS Global'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. ROCE is, after all, simply a snap shot of a single year. How cyclical is ICS Global? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
ICS Global's Current Liabilities And Their Impact On Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.
ICS Global has total assets of AU$10m and current liabilities of AU$3.4m. Therefore its current liabilities are equivalent to approximately 33% of its total assets. ICS Global has a medium level of current liabilities, boosting its ROCE somewhat.
The Bottom Line On ICS Global's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. ICS Global shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
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