Today we are going to look at KHFM Hospitality and Facility Management Services Limited (NSE:KHFM) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the 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. Last but not least, we'll look at what impact its current liabilities have on 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. 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?
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 KHFM Hospitality and Facility Management Services:
0.25 = ₹68m ÷ (₹516m - ₹246m) (Based on the trailing twelve months to March 2018.)
Therefore, KHFM Hospitality and Facility Management Services has an ROCE of 25%.
Check out our latest analysis for KHFM Hospitality and Facility Management Services
Does KHFM Hospitality and Facility Management Services Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that KHFM Hospitality and Facility Management Services's ROCE is meaningfully better than the 12% average in the Commercial Services industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where KHFM Hospitality and Facility Management Services sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
KHFM Hospitality and Facility Management Services's current ROCE of 25% is lower than 3 years ago, when the company reported a 43% ROCE. Therefore we wonder if the company is facing new headwinds.
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. ROCE is only a point-in-time measure. You can check if KHFM Hospitality and Facility Management Services has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.