Today we'll evaluate Nitiraj Engineers Limited (NSE:NITIRAJ) 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding 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. Generally speaking a higher ROCE is better. 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?
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 Nitiraj Engineers:
0.12 = ₹81m ÷ (₹728m - ₹58m) (Based on the trailing twelve months to March 2019.)
So, Nitiraj Engineers has an ROCE of 12%.
Check out our latest analysis for Nitiraj Engineers
Is Nitiraj Engineers's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Nitiraj Engineers's ROCE appears to be significantly below the 16% average in the Electronic industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Separate from how Nitiraj Engineers stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
We can see that, Nitiraj Engineers currently has an ROCE of 12%, less than the 24% it reported 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Nitiraj Engineers's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. How cyclical is Nitiraj Engineers? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.