Today we are going to look at Sify Technologies Limited (NASDAQ:SIFY) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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 Sify Technologies:
0.12 = ₹1.5b ÷ (₹27b - ₹14b) (Based on the trailing twelve months to March 2019.)
Therefore, Sify Technologies has an ROCE of 12%.
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Is Sify Technologies's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Sify Technologies's ROCE is meaningfully better than the 6.3% average in the Telecom industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Sify Technologies sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Sify Technologies.
How Sify Technologies's Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Sify Technologies has total assets of ₹27b and current liabilities of ₹14b. Therefore its current liabilities are equivalent to approximately 53% of its total assets. Sify Technologies has a relatively high level of current liabilities, boosting its ROCE meaningfully.
What We Can Learn From Sify Technologies's ROCE
This ROCE is pretty good, but remember that it would look less impressive with fewer current liabilities. Sify Technologies 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.
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We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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.