Are Seamec Limited’s (NSE:SEAMECLTD) High Returns Really That Great?
Today we are going to look at Seamec Limited (NSE:SEAMECLTD) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
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. 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'.
So, How Do We Calculate ROCE?
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 Seamec:
0.26 = ₹891m ÷ (₹4.8b - ₹1.4b) (Based on the trailing twelve months to March 2019.)
Therefore, Seamec has an ROCE of 26%.
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Does Seamec Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Seamec's ROCE is meaningfully higher than the 21% average in the Energy 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. Setting aside the comparison to its industry for a moment, Seamec's ROCE in absolute terms currently looks quite high.
Seamec delivered an ROCE of 26%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability.
When considering this metric, keep in mind that it is backwards looking, and 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. Given the industry it operates in, Seamec could be considered cyclical. How cyclical is Seamec? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Seamec'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.
Seamec has total liabilities of ₹1.4b and total assets of ₹4.8b. As a result, its current liabilities are equal to approximately 28% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.
The Bottom Line On Seamec's ROCE
Low current liabilities and high ROCE is a good combination, making Seamec look quite interesting. There might be better investments than Seamec 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.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.
