Today we are going to look at Akash Infra-Projects Limited (NSE:AKASH) to see whether it might be an attractive investment prospect. 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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?

The formula for calculating the return on capital employed is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Akash Infra-Projects:

0.045 = ₹41m ÷ (₹1.5b - ₹554m) (Based on the trailing twelve months to March 2019.)

So, Akash Infra-Projects has an ROCE of 4.5%.

View our latest analysis for Akash Infra-Projects

Is Akash Infra-Projects's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Akash Infra-Projects's ROCE appears to be significantly below the 14% average in the Construction industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Akash Infra-Projects compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.6% available in government bonds. It is likely that there are more attractive prospects out there.

The image below shows how Akash Infra-Projects's ROCE compares to its industry, and you can click it to see more detail on its past growth.

When considering this metric, keep in mind that it is backwards looking, and 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. How cyclical is Akash Infra-Projects? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Akash Infra-Projects's Current Liabilities And Their Impact On 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 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.

Akash Infra-Projects has total liabilities of ₹554m and total assets of ₹1.5b. Therefore its current liabilities are equivalent to approximately 38% of its total assets. Akash Infra-Projects has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.

What We Can Learn From Akash Infra-Projects's ROCE

So researching other companies may be a better use of your time. Of course, you might also be able to find a better stock than Akash Infra-Projects. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.