In This Article:
Today we’ll look at Crompton Greaves Consumer Electricals Limited (NSE:CROMPTON) 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. 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 measures the ‘return’ (pre-tax profit) a company generates from capital employed in its 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’.
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 Crompton Greaves Consumer Electricals:
0.46 = ₹5.2b ÷ (₹23b – ₹11b) (Based on the trailing twelve months to September 2018.)
Therefore, Crompton Greaves Consumer Electricals has an ROCE of 46%.
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Does Crompton Greaves Consumer Electricals Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Crompton Greaves Consumer Electricals’s ROCE is meaningfully better than the 16% average in the Consumer Durables industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Crompton Greaves Consumer Electricals’s ROCE in absolute terms currently looks quite high.
Our data shows that Crompton Greaves Consumer Electricals currently has an ROCE of 46%, compared to its ROCE of 23% 3 years ago. This makes us think the business might be improving.
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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Crompton Greaves Consumer Electricals.