In This Article:
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Today we'll look at Gujarat Ambuja Exports Limited (NSE:GAEL) and reflect on its potential as an investment. 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. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
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. 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?
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 Gujarat Ambuja Exports:
0.23 = ₹2.9b ÷ (₹17b - ₹4.5b) (Based on the trailing twelve months to March 2019.)
So, Gujarat Ambuja Exports has an ROCE of 23%.
View our latest analysis for Gujarat Ambuja Exports
Is Gujarat Ambuja Exports's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Gujarat Ambuja Exports's ROCE is meaningfully higher than the 12% average in the Food industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Gujarat Ambuja Exports sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Our data shows that Gujarat Ambuja Exports currently has an ROCE of 23%, compared to its ROCE of 13% 3 years ago. This makes us think the business might be improving. You can see in the image below how Gujarat Ambuja Exports's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. You can check if Gujarat Ambuja Exports has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.