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What Can We Make Of WNS (Holdings) Limited’s (NYSE:WNS) High Return On Capital?

Simply Wall St

Today we are going to look at WNS (Holdings) Limited (NYSE:WNS) 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.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

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. 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 WNS (Holdings):

0.16 = US$126m ÷ (US$968m - US$189m) (Based on the trailing twelve months to June 2019.)

So, WNS (Holdings) has an ROCE of 16%.

View our latest analysis for WNS (Holdings)

Is WNS (Holdings)'s ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, we find that WNS (Holdings)'s ROCE is meaningfully better than the 9.9% average in the IT industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how WNS (Holdings) compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

The image below shows how WNS (Holdings)'s ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:WNS Past Revenue and Net Income, September 12th 2019
NYSE:WNS Past Revenue and Net Income, September 12th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for WNS (Holdings).

What Are Current Liabilities, And How Do They Affect WNS (Holdings)'s 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.

WNS (Holdings) has total assets of US$968m and current liabilities of US$189m. Therefore its current liabilities are equivalent to approximately 19% of its total assets. Low current liabilities are not boosting the ROCE too much.

What We Can Learn From WNS (Holdings)'s ROCE

This is good to see, and with a sound ROCE, WNS (Holdings) could be worth a closer look. There might be better investments than WNS (Holdings) 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.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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 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.