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Today we’ll look at TAJGVK Hotels & Resorts Limited (NSE:TAJGVK) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
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. 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’.
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 TAJGVK Hotels & Resorts:
0.085 = ₹568m ÷ (₹7.3b – ₹1.1b) (Based on the trailing twelve months to December 2018.)
So, TAJGVK Hotels & Resorts has an ROCE of 8.5%.
See our latest analysis for TAJGVK Hotels & Resorts
Does TAJGVK Hotels & Resorts Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that TAJGVK Hotels & Resorts’s ROCE is meaningfully better than the 7.0% average in the Hospitality industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of how TAJGVK Hotels & Resorts stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
In our analysis, TAJGVK Hotels & Resorts’s ROCE appears to be 8.5%, compared to 3 years ago, when its ROCE was 5.5%. This makes us think the business might be improving.
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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for TAJGVK Hotels & Resorts.