Why Public Joint Stock Company ARMADA’s (MCX:ARMD) Use Of Investor Capital Doesn’t Look Great
Today we'll evaluate Public Joint Stock Company ARMADA (MCX:ARMD) to determine whether it could have potential as an investment idea. 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is 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. 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'.
So, How Do We Calculate ROCE?
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 ARMADA:
0.011 = RUруб16m ÷ (RUруб1.7b - RUруб145m) (Based on the trailing twelve months to June 2018.)
So, ARMADA has an ROCE of 1.1%.
See our latest analysis for ARMADA
Is ARMADA's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, ARMADA's ROCE appears meaningfully below the 13% average reported by the IT industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how ARMADA compares to its industry, its ROCE in absolute terms is low; especially compared to the ~8.4% available in government bonds. There are potentially more appealing investments elsewhere.
ARMADA has an ROCE of 1.1%, but it didn't have an ROCE 3 years ago, since it was unprofitable. This makes us wonder if the company is improving.
It is important to remember that ROCE shows past performance, and is 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 ARMADA? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
ARMADA'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. 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.
ARMADA has total liabilities of RUруб145m and total assets of RUруб1.7b. Therefore its current liabilities are equivalent to approximately 8.7% of its total assets. ARMADA has very few current liabilities, which have a minimal effect on its already low ROCE.
The Bottom Line On ARMADA's ROCE
Nonetheless, there may be better places to invest your capital. Of course, you might also be able to find a better stock than ARMADA. So you may wish to see this free collection of other companies that have grown earnings strongly.
I will like ARMADA 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.
