In This Article:
Today we’ll evaluate Sambhaav Media Limited (NSE:SAMBHAAV) to determine whether it could have potential as an investment idea. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
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 Sambhaav Media:
0.068 = ₹60m ÷ (₹992m – ₹110m) (Based on the trailing twelve months to March 2018.)
So, Sambhaav Media has an ROCE of 6.8%.
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Is Sambhaav Media’s ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Sambhaav Media’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. Independently of how Sambhaav Media compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.7% available in government bonds. There are potentially more appealing investments elsewhere.
Sambhaav Media’s current ROCE of 6.8% is lower than its ROCE in the past, which was 9.2%, 3 years ago. This makes us wonder if the business is facing new challenges.
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. You can check if Sambhaav Media has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.