Today we’ll look at Accuracy Shipping Limited (NSE:ACCURACY) and reflect on its potential as an investment. 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 up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.

What is 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. Overall, it is a valuable metric that has its flaws. 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’.

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 Accuracy Shipping:

0.36 = ₹190m ÷ (₹930m – ₹407m) (Based on the trailing twelve months to March 2018.)

Therefore, Accuracy Shipping has an ROCE of 36%.

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Is Accuracy Shipping’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Accuracy Shipping’s ROCE is meaningfully better than the 21% average in the Logistics 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, Accuracy Shipping’s ROCE currently appears to be excellent.

As we can see, Accuracy Shipping currently has an ROCE of 36% compared to its ROCE 3 years ago, which was 26%. This makes us wonder if the company is improving.

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. ROCE is, after all, simply a snap shot of a single year. If Accuracy Shipping is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Accuracy Shipping’s ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

Accuracy Shipping has total assets of ₹930m and current liabilities of ₹407m. As a result, its current liabilities are equal to approximately 44% of its total assets. Accuracy Shipping’s ROCE is boosted somewhat by its middling amount of current liabilities.

Our Take On Accuracy Shipping’s ROCE

Even so, it has a great ROCE, and could be an attractive prospect for further research. Of course you might be able to find a better stock than Accuracy Shipping. So you may wish to see this free collection of other companies that have grown earnings strongly.

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

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.