In This Article:
Today we are going to look at Jayant Agro-Organics Limited (NSE:JAYAGROGN) 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting 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'.
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 Jayant Agro-Organics:
0.33 = ₹1.3b ÷ (₹9.9b - ₹5.9b) (Based on the trailing twelve months to December 2018.)
So, Jayant Agro-Organics has an ROCE of 33%.
View our latest analysis for Jayant Agro-Organics
Is Jayant Agro-Organics's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Jayant Agro-Organics's ROCE is meaningfully better than the 16% average in the Chemicals industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Jayant Agro-Organics's ROCE currently appears to be excellent.
As we can see, Jayant Agro-Organics currently has an ROCE of 33% compared to its ROCE 3 years ago, which was 19%. This makes us think about whether the company has been reinvesting shrewdly.
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 Jayant Agro-Organics.
How Jayant Agro-Organics's Current Liabilities Impact 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 counteract this, we check if a company has high current liabilities, relative to its total assets.