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Examining Excelsior Capital Limited’s (ASX:ECL) Weak Return On Capital Employed

Today we’ll evaluate Excelsior Capital Limited (ASX:ECL) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

Understanding 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:

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Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

Or for Excelsior Capital:

0.13 = AU$6.3m ÷ (AU$55m – AU$5.6m) (Based on the trailing twelve months to June 2018.)

So, Excelsior Capital has an ROCE of 13%.

Check out our latest analysis for Excelsior Capital

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Does Excelsior Capital Have A Good ROCE?

One way to assess ROCE is to compare similar companies. We can see Excelsior Capital’s ROCE is around the 12% average reported by the Electrical industry. Regardless of where Excelsior Capital sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

ASX:ECL Last Perf January 20th 19
ASX:ECL Last Perf January 20th 19

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, after all, simply a snap shot of a single year. If Excelsior Capital is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Do Excelsior Capital’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 the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.

Excelsior Capital has total liabilities of AU$5.6m and total assets of AU$55m. As a result, its current liabilities are equal to approximately 10% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

The Bottom Line On Excelsior Capital’s ROCE

This is good to see, and with a sound ROCE, Excelsior Capital could be worth a closer look. 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.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.