Are SecUR Credentials Limited’s (NSE:SECURCRED) High Returns Really That Great?

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Today we'll evaluate SecUR Credentials Limited (NSE:SECURCRED) to determine whether it could have potential as an investment idea. 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. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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 SecUR Credentials:

0.17 = ₹97m ÷ (₹888m - ₹316m) (Based on the trailing twelve months to March 2019.)

So, SecUR Credentials has an ROCE of 17%.

Check out our latest analysis for SecUR Credentials

Is SecUR Credentials's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. SecUR Credentials's ROCE appears to be substantially greater than the 12% average in the Professional Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from SecUR Credentials's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

You can see in the image below how SecUR Credentials's ROCE compares to its industry. Click to see more on past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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, after all, simply a snap shot of a single year. If SecUR Credentials is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Do SecUR Credentials's Current Liabilities Skew Its 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.

SecUR Credentials has total liabilities of ₹316m and total assets of ₹888m. Therefore its current liabilities are equivalent to approximately 36% of its total assets. SecUR Credentials has a medium level of current liabilities, which would boost the ROCE.

What We Can Learn From SecUR Credentials's ROCE

While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. There might be better investments than SecUR Credentials out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

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.