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Today we'll evaluate Supreme Engineering Limited (NSE:SUPREMEENG) 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 up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE 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 measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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.'
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 Supreme Engineering:
0.22 = ₹154m ÷ (₹1.9b - ₹1.2b) (Based on the trailing twelve months to March 2019.)
Therefore, Supreme Engineering has an ROCE of 22%.
View our latest analysis for Supreme Engineering
Is Supreme Engineering's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Supreme Engineering's ROCE is meaningfully better than the 14% average in the Metals and Mining industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Supreme Engineering's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
In our analysis, Supreme Engineering's ROCE appears to be 22%, compared to 3 years ago, when its ROCE was 16%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Supreme Engineering'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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Given the industry it operates in, Supreme Engineering could be considered cyclical. How cyclical is Supreme Engineering? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.