In This Article:
Today we'll look at Garden Reach Shipbuilders & Engineers Limited (NSE:GRSE) 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. 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. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
So, How Do We Calculate ROCE?
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 Garden Reach Shipbuilders & Engineers:
0.022 = ₹250m ÷ (₹42b - ₹31b) (Based on the trailing twelve months to June 2019.)
So, Garden Reach Shipbuilders & Engineers has an ROCE of 2.2%.
See our latest analysis for Garden Reach Shipbuilders & Engineers
Is Garden Reach Shipbuilders & Engineers's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Garden Reach Shipbuilders & Engineers's ROCE is meaningfully below the Aerospace & Defense industry average of 14%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Garden Reach Shipbuilders & Engineers's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
In our analysis, Garden Reach Shipbuilders & Engineers's ROCE appears to be 2.2%, compared to 3 years ago, when its ROCE was 0.2%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Garden Reach Shipbuilders & Engineers's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. How cyclical is Garden Reach Shipbuilders & Engineers? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.