In This Article:
Today we are going to look at National Fertilizers Limited (NSE:NFL) 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.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. Generally speaking a higher ROCE is better. 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 National Fertilizers:
0.11 = ₹5.9b ÷ (₹139b - ₹85b) (Based on the trailing twelve months to June 2019.)
So, National Fertilizers has an ROCE of 11%.
View our latest analysis for National Fertilizers
Is National Fertilizers's ROCE Good?
One way to assess ROCE is to compare similar companies. In this analysis, National Fertilizers's ROCE appears meaningfully below the 17% average reported by the Chemicals industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, National Fertilizers's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
In our analysis, National Fertilizers's ROCE appears to be 11%, compared to 3 years ago, when its ROCE was 8.2%. This makes us think the business might be improving. You can see in the image below how National Fertilizers's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. If National Fertilizers is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.