Today we'll look at Seeka Limited (NZSE:SEK) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. 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.
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 Seeka:
0.051 = NZ$15m ÷ (NZ$407m - NZ$111m) (Based on the trailing twelve months to June 2019.)
So, Seeka has an ROCE of 5.1%.
Does Seeka Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Seeka's ROCE appears meaningfully below the 8.0% average reported by the Food industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Seeka's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
Seeka's current ROCE of 5.1% is lower than its ROCE in the past, which was 8.5%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Seeka's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Seeka'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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Seeka has total assets of NZ$407m and current liabilities of NZ$111m. As a result, its current liabilities are equal to approximately 27% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.
Our Take On Seeka's ROCE
While that is good to see, Seeka has a low ROCE and does not look attractive in this analysis. Of course, you might also be able to find a better stock than Seeka. So you may wish to see this free collection of other companies that have grown earnings strongly.
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 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.