In This Article:
Today we'll evaluate Kokuyo Camlin Limited (NSE:KOKUYOCMLN) 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. All else being equal, a better business will have a higher ROCE. 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 Kokuyo Camlin:
0.12 = ₹350m ÷ (₹5.5b - ₹2.7b) (Based on the trailing twelve months to March 2019.)
So, Kokuyo Camlin has an ROCE of 12%.
See our latest analysis for Kokuyo Camlin
Does Kokuyo Camlin Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see Kokuyo Camlin's ROCE is around the 13% average reported by the Commercial Services industry. Separate from how Kokuyo Camlin stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
Our data shows that Kokuyo Camlin currently has an ROCE of 12%, compared to its ROCE of 5.5% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Kokuyo Camlin's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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, after all, simply a snap shot of a single year. How cyclical is Kokuyo Camlin? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Kokuyo Camlin's Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.