In This Article:
Today we'll look at Savita Oil Technologies Limited (NSE:SOTL) and reflect on its potential as an investment. 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.
First of all, we'll work out how to 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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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'.
How Do You Calculate Return On Capital Employed?
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 Savita Oil Technologies:
0.20 = ₹1.7b ÷ (₹14b - ₹5.6b) (Based on the trailing twelve months to March 2019.)
Therefore, Savita Oil Technologies has an ROCE of 20%.
Check out our latest analysis for Savita Oil Technologies
Is Savita Oil Technologies's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Savita Oil Technologies's ROCE appears to be around the 18% average of the Chemicals industry. Separate from Savita Oil Technologies's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that , Savita Oil Technologies currently has an ROCE of 20% compared to its ROCE 3 years ago, which was 11%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Savita Oil Technologies's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Savita Oil Technologies has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.