Why We Like Macpower CNC Machines Limited’s (NSE:MACPOWER) 23% Return On Capital Employed

Simply Wall St

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 Macpower CNC Machines Limited (NSE:MACPOWER) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. 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 Macpower CNC Machines:

0.23 = ₹154m ÷ (₹1.1b - ₹430m) (Based on the trailing twelve months to March 2019.)

Therefore, Macpower CNC Machines has an ROCE of 23%.

See our latest analysis for Macpower CNC Machines

Does Macpower CNC Machines Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Macpower CNC Machines's ROCE is meaningfully higher than the 13% average in the Machinery industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Macpower CNC Machines'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 Macpower CNC Machines's ROCE compares to its industry. Click to see more on past growth.

NSEI:MACPOWER Past Revenue and Net Income, July 8th 2019
NSEI:MACPOWER Past Revenue and Net Income, July 8th 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. If Macpower CNC Machines is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Macpower CNC Machines's Current Liabilities And Their Impact On 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.

Macpower CNC Machines has total assets of ₹1.1b and current liabilities of ₹430m. As a result, its current liabilities are equal to approximately 39% of its total assets. With this level of current liabilities, Macpower CNC Machines's ROCE is boosted somewhat.

The Bottom Line On Macpower CNC Machines's ROCE

While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Macpower CNC Machines looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.