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Today we'll evaluate Career Point Limited (NSE:CAREERP) 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
What is 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. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 Career Point:
0.069 = ₹316m ÷ (₹5.3b - ₹686m) (Based on the trailing twelve months to March 2019.)
Therefore, Career Point has an ROCE of 6.9%.
View our latest analysis for Career Point
Does Career Point Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Career Point's ROCE is meaningfully better than the 4.8% average in the Consumer Services industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Career Point compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.6% available in government bonds. There are potentially more appealing investments elsewhere.
Our data shows that Career Point currently has an ROCE of 6.9%, compared to its ROCE of 4.2% 3 years ago. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Career Point's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. How cyclical is Career Point? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.