In This Article:
Today we’ll evaluate IFGL Refractories Limited (NSE:IFGLEXPOR) 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 of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed 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’.
So, How Do We Calculate ROCE?
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 IFGL Refractories:
0.11 = ₹789m ÷ (₹10b – ₹2.2b) (Based on the trailing twelve months to September 2018.)
Therefore, IFGL Refractories has an ROCE of 11%.
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Does IFGL Refractories Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, IFGL Refractories’s ROCE appears to be around the 9.9% average of the Basic Materials industry. Aside from the industry comparison, IFGL Refractories’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
IFGL Refractories’s current ROCE of 11% is lower than 3 years ago, when the company reported a 19% ROCE. This makes us wonder if the business is facing new challenges.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. 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.