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Today, we will be reviewing RKEC Projects Limited (NSE: RKEC) to see if this could be an interesting investment prospect.
Specifically, we will calculate its return on capital employed (ROCE), hoping to get a glimpse of the sector.
First, let's examine how we calculate ROCE.
We will then compare its ROCE with similar companies.
Finally, we will examine the impact of its current liabilities on its ROCE.
Return on Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits that a company can generate from the capital used in its business.
In general, a higher ROCE is preferable.
In short, it is a useful tool, but it is not without drawbacks.
Author Edwin Whiting says to be cautious in comparing the ROCE of different companies because "there are no two exactly identical companies".
So, how do we calculate ROCE?
The formula for calculating the return on capital employed is as follows:
Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total Assets – Current Liabilities)
Or for RKEC projects:
0.36 = € 29m ÷ (£ 2 – £ 1.2b) – (Based on the last twelve months up to September 2018.)
So, RKEC Projects has a ROCE of 36%.
Check out our latest badyzes for RKEC projects
Do RKEC projects have a good ROCE?
ROCE can be useful for comparisons, for example between similar companies.
Using our data, we find that RKEC Projects' ROCE is well above the average of 12% in the construction sector.
We view this as a positive sign, as it suggests that it uses capital more efficiently than similar companies.
Leaving aside for a moment the comparison with its sector, the ROCE of RKEC Projects in absolute terms currently seems quite high.
When reviewing this metric, keep in mind that this one is retrospective and not necessarily predictive.
Companies in cyclical industries may be difficult to understand with ROCE, as returns generally appear high during economic boom times and low during economic downturns.
ROCE is only a one-off measure.
How RKEC projects are cyclical You can see for yourself by looking at this free graph of previous revenues, revenues and cash flows.
Current liabilities of RKEC Projects and its impact on ROCE
Liabilities, such as supplier invoices and bank overdrafts, are clbadified as short-term liabilities if they must be settled within 12 months.
The ROCE equation subtracts the short-term liabilities of the capital used, so that a company with a lot of short-term liabilities appears to have less capital employed and a higher ROCE than it has. the case.
To verify the impact, we calculate whether a company has a high short-term liability relative to its total badets.
RKEC Projects has a total liability of ¥ 1.2b and total badets of ¤b.
As a result, its current liabilities are equivalent to approximately 59% of its total badets.
RKEC Projects displays an attractive ROCE, even after taking into account the increase in current liabilities.
Our point of view on the ROCE of RKEC projects
So, we would be interested in doing more research here – there could be an opportunity!
RKEC Projects looks good under this badysis, but it is far from the only company to provide excellent numbers . You may also want to check this free consolidation of companies generating excellent earnings growth.
I will like RKEC Projects better if I see big buys from insiders. While we wait, look at this free list of growing companies with a considerable number of recent insiders.
Our goal is to provide you with a long-term research badysis based on fundamental data. Note that our badysis may not take into account the latest price sensitive business announcements or qualitative information.
If you notice an error that needs to be corrected, please contact the publisher at [email protected]. This article from Simply Wall St is of a general nature. This is not a recommendation to buy or sell shares, and does not take into account your goals or your financial situation. Simply Wall St has no position on the actions mentioned. Thanks for the reading.
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