Today we are going to look at Acceleware Ltd. (CVE:AXE) 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. And finally, we'll look at how its current liabilities are impacting 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. In brief, it is a useful tool, but it is not without drawbacks. 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 Acceleware:
0.46 = CA$997k ÷ (CA$6.8m - CA$4.6m) (Based on the trailing twelve months to June 2019.)
So, Acceleware has an ROCE of 46%.
Does Acceleware Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Acceleware's ROCE appears to be substantially greater than the 13% average in the Software 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. Regardless of the industry comparison, in absolute terms, Acceleware's ROCE currently appears to be excellent.
You can click on the image below to see (in greater detail) how Acceleware's past growth compares to other companies.
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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. How cyclical is Acceleware? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How Acceleware'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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Acceleware has total liabilities of CA$4.6m and total assets of CA$6.8m. Therefore its current liabilities are equivalent to approximately 68% of its total assets. While a high level of current liabilities boosts its ROCE, Acceleware's returns are still very good.
Our Take On Acceleware's ROCE
So we would be interested in doing more research here -- there may be an opportunity! Acceleware looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.
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