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Today we are going to look at Raj Television Network Limited (NSE:RAJTV) 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.
Firstly, we'll go over how we 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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
So, How Do We Calculate ROCE?
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 Raj Television Network:
0.045 = ₹73m ÷ (₹1.9b - ₹288m) (Based on the trailing twelve months to March 2019.)
Therefore, Raj Television Network has an ROCE of 4.5%.
View our latest analysis for Raj Television Network
Is Raj Television Network's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Raj Television Network's ROCE is meaningfully below the Media industry average of 16%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Raj Television Network's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
Raj Television Network reported an ROCE of 4.5% -- better than 3 years ago, when the company didn't make a profit. That suggests the business has returned to profitability.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 Raj Television Network is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.