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Today we'll evaluate Godrej Agrovet Limited (NSE:GODREJAGRO) 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding 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. 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?
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 Godrej Agrovet:
0.18 = ₹3.7b ÷ (₹39b - ₹19b) (Based on the trailing twelve months to December 2018.)
So, Godrej Agrovet has an ROCE of 18%.
View our latest analysis for Godrej Agrovet
Is Godrej Agrovet's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Godrej Agrovet's ROCE appears to be substantially greater than the 13% average in the Food industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Godrej Agrovet sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Godrej Agrovet's current ROCE of 18% is lower than its ROCE in the past, which was 26%, 3 years ago. So investors might consider if it has had issues recently.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.