In This Article:
Today we'll evaluate The Peria Karamalai Tea and Produce Company Limited (NSE:PKTEA) 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.
First of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed 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?
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 Peria Karamalai Tea and Produce:
0.031 = ₹58m ÷ (₹2.0b - ₹181m) (Based on the trailing twelve months to March 2019.)
So, Peria Karamalai Tea and Produce has an ROCE of 3.1%.
Check out our latest analysis for Peria Karamalai Tea and Produce
Is Peria Karamalai Tea and Produce's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Peria Karamalai Tea and Produce's ROCE appears meaningfully below the 12% average reported by the Food industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Peria Karamalai Tea and Produce compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.6% available in government bonds. Readers may wish to look for more rewarding investments.
Peria Karamalai Tea and Produce reported an ROCE of 3.1% -- better than 3 years ago, when the company didn't make a profit. That suggests the business has returned to profitability. The image below shows how Peria Karamalai Tea and Produce's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. If Peria Karamalai Tea and Produce is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.