In This Article:
Today we’ll evaluate Kanani Industries Limited (NSE:KANANIIND) to determine whether it could have potential as an investment idea. 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.
Firstly, 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.
What is 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. 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.’
How Do You Calculate Return On Capital Employed?
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 Kanani Industries:
0.014 = ₹7.7m ÷ (₹1.6b – ₹1.1b) (Based on the trailing twelve months to March 2018.)
Therefore, Kanani Industries has an ROCE of 1.4%.
Check out our latest analysis for Kanani Industries
Does Kanani Industries Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Kanani Industries’s ROCE appears meaningfully below the 11% average reported by the Luxury industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Kanani Industries compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.6% available in government bonds. There are potentially more appealing investments elsewhere.
Kanani Industries’s current ROCE of 1.4% is lower than its ROCE in the past, which was 5.1%, 3 years ago. Therefore we wonder if the company is facing new headwinds.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. How cyclical is Kanani Industries? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.