Today we are going to look at Hatsun Agro Product Limited (NSE:HATSUNPP) to see whether it might be an attractive investment prospect. 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.
First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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.’
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 Hatsun Agro Product:
0.19 = ₹2.0b ÷ (₹21b – ₹8.5b) (Based on the trailing twelve months to December 2018.)
Therefore, Hatsun Agro Product has an ROCE of 19%.
See our latest analysis for Hatsun Agro Product
Does Hatsun Agro Product Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Hatsun Agro Product’s ROCE appears to be substantially greater than the 14% average in the Food industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Hatsun Agro Product’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Hatsun Agro Product’s current ROCE of 19% is lower than 3 years ago, when the company reported a 36% 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 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Hatsun Agro Product.
Hatsun Agro Product’s Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.