In This Article:
Today we'll look at Fiem Industries Limited (NSE:FIEMIND) 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
How Do You Calculate Return On Capital Employed?
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 Fiem Industries:
0.16 = ₹952m ÷ (₹9.4b - ₹3.5b) (Based on the trailing twelve months to March 2018.)
So, Fiem Industries has an ROCE of 16%.
See our latest analysis for Fiem Industries
Does Fiem Industries Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Fiem Industries's ROCE is around the 16% average reported by the Auto Components industry. Regardless of where Fiem Industries sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Fiem Industries's current ROCE of 16% is lower than 3 years ago, when the company reported a 23% ROCE. So investors might consider if it has had issues recently.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Fiem Industries's Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.