Today we'll look at Bombay Super Hybrid Seeds Limited (NSE:BSHSL) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of 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.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 Bombay Super Hybrid Seeds:
0.17 = ₹28m ÷ (₹308m - ₹145m) (Based on the trailing twelve months to March 2018.)
So, Bombay Super Hybrid Seeds has an ROCE of 17%.
See our latest analysis for Bombay Super Hybrid Seeds
Does Bombay Super Hybrid Seeds Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Bombay Super Hybrid Seeds's ROCE is meaningfully better than the 13% average in the Food industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Bombay Super Hybrid Seeds sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. You can check if Bombay Super Hybrid Seeds has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Bombay Super Hybrid Seeds'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 counteract this, we check if a company has high current liabilities, relative to its total assets.