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Today we'll evaluate Artedz Fabs Limited (NSE:ARTEDZ) 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
So, How Do We Calculate ROCE?
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 Artedz Fabs:
0.12 = ₹41m ÷ (₹722m - ₹379m) (Based on the trailing twelve months to March 2019.)
Therefore, Artedz Fabs has an ROCE of 12%.
View our latest analysis for Artedz Fabs
Is Artedz Fabs's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. We can see Artedz Fabs's ROCE is around the 12% average reported by the Luxury industry. Aside from the industry comparison, Artedz Fabs's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
We can see that , Artedz Fabs currently has an ROCE of 12%, less than the 23% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Artedz Fabs's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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 Artedz Fabs is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.