In This Article:
Today we'll evaluate Eimco Elecon (India) Limited (NSE:EIMCOELECO) 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting 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. Ultimately, it is a useful but imperfect metric. 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?
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 Eimco Elecon (India):
0.071 = ₹218m ÷ (₹3.5b - ₹426m) (Based on the trailing twelve months to December 2018.)
Therefore, Eimco Elecon (India) has an ROCE of 7.1%.
Check out our latest analysis for Eimco Elecon (India)
Is Eimco Elecon (India)'s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Eimco Elecon (India)'s ROCE is meaningfully below the Machinery industry average of 15%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Eimco Elecon (India)'s performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
As we can see, Eimco Elecon (India) currently has an ROCE of 7.1%, less than the 12% it reported 3 years ago. So investors might consider if it has had issues recently.
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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Eimco Elecon (India).