AMD Industries Limited (NSE:AMDIND) Might Not Be A Great Investment
Today we are going to look at AMD Industries Limited (NSE:AMDIND) 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE 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 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 AMD Industries:
0.06 = ₹88m ÷ (₹2.4b - ₹942m) (Based on the trailing twelve months to June 2019.)
So, AMD Industries has an ROCE of 6.0%.
Check out our latest analysis for AMD Industries
Does AMD Industries Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, AMD Industries's ROCE appears to be significantly below the 15% average in the Packaging industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how AMD Industries 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.
You can click on the image below to see (in greater detail) how AMD Industries's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is 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 only a point-in-time measure. If AMD Industries is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How AMD Industries'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.
AMD Industries has total assets of ₹2.4b and current liabilities of ₹942m. As a result, its current liabilities are equal to approximately 39% of its total assets. AMD Industries has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.
What We Can Learn From AMD Industries's ROCE
There are likely better investments out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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.
