Today we are going to look at Manaksia Steels Limited (NSE:MANAKSTELTD) 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 Manaksia Steels:
0.077 = ₹145m ÷ (₹3.4b - ₹1.5b) (Based on the trailing twelve months to March 2019.)
So, Manaksia Steels has an ROCE of 7.7%.
Does Manaksia Steels Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see Manaksia Steels's ROCE is meaningfully below the Metals and Mining industry average of 14%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how Manaksia Steels stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
We can see that , Manaksia Steels currently has an ROCE of 7.7% compared to its ROCE 3 years ago, which was 5.9%. This makes us wonder if the company is improving. You can see in the image below how Manaksia Steels'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. ROCE is, after all, simply a snap shot of a single year. Given the industry it operates in, Manaksia Steels could be considered cyclical. How cyclical is Manaksia Steels? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Manaksia Steels's Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Manaksia Steels has total liabilities of ₹1.5b and total assets of ₹3.4b. Therefore its current liabilities are equivalent to approximately 44% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Manaksia Steels's ROCE is concerning.
Our Take On Manaksia Steels's ROCE
So researching other companies may be a better use of your time. You might be able to find a better investment than Manaksia Steels. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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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.