Today we'll look at AXISCADES Engineering Technologies Limited (NSE:AXISCADES) and reflect on its potential as an investment. 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, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared 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. 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?

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 AXISCADES Engineering Technologies:

0.017 = ₹74m ÷ (₹7.7b - ₹3.3b) (Based on the trailing twelve months to June 2019.)

So, AXISCADES Engineering Technologies has an ROCE of 1.7%.

View our latest analysis for AXISCADES Engineering Technologies

Does AXISCADES Engineering Technologies Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see AXISCADES Engineering Technologies's ROCE is meaningfully below the Construction industry average of 13%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside AXISCADES Engineering Technologies's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.

We can see that, AXISCADES Engineering Technologies currently has an ROCE of 1.7%, less than the 24% it reported 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how AXISCADES Engineering Technologies's past growth compares to other companies.

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. How cyclical is AXISCADES Engineering Technologies? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

AXISCADES Engineering Technologies'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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.

AXISCADES Engineering Technologies has total liabilities of ₹3.3b and total assets of ₹7.7b. As a result, its current liabilities are equal to approximately 42% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, AXISCADES Engineering Technologies's ROCE is concerning.

Our Take On AXISCADES Engineering Technologies's ROCE

This company may not be the most attractive investment prospect. 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.

I will like AXISCADES Engineering Technologies better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.