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Today we are going to look at Sambhaav Media Limited (NSE:SAMBHAAV) to see whether it might be an attractive investment prospect. 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, 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.
What is 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. 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. 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 Sambhaav Media:
0.04 = ₹36m ÷ (₹1.1b - ₹210m) (Based on the trailing twelve months to June 2019.)
Therefore, Sambhaav Media has an ROCE of 4.0%.
See our latest analysis for Sambhaav Media
Is Sambhaav Media's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Sambhaav Media's ROCE is meaningfully below the Media industry average of 17%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Sambhaav Media compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.6% available in government bonds. It is likely that there are more attractive prospects out there.
Sambhaav Media's current ROCE of 4.0% is lower than 3 years ago, when the company reported a 6.4% ROCE. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Sambhaav Media's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and 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. You can check if Sambhaav Media has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.