In This Article:
Today we'll evaluate Umang Dairies Limited (NSE:UMANGDAIRY) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we'll work out how to calculate ROCE. 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.
Understanding 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. In brief, it is a useful tool, but it is not without drawbacks. 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 Umang Dairies:
0.13 = ₹105m ÷ (₹1.2b - ₹367m) (Based on the trailing twelve months to September 2019.)
So, Umang Dairies has an ROCE of 13%.
Check out our latest analysis for Umang Dairies
Does Umang Dairies Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, Umang Dairies's ROCE appears to be around the 13% average of the Food industry. Setting aside the industry comparison for now, Umang Dairies's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
Umang Dairies's current ROCE of 13% is lower than 3 years ago, when the company reported a 19% ROCE. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Umang Dairies's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Umang Dairies is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.