In This Article:
Today we'll evaluate PG Electroplast Limited (NSE:PGEL) 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.
Firstly, we'll go over how we calculate ROCE. 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 '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. 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.'
How Do You Calculate Return On Capital Employed?
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 PG Electroplast:
0.091 = ₹203m ÷ (₹4.1b - ₹1.9b) (Based on the trailing twelve months to June 2019.)
So, PG Electroplast has an ROCE of 9.1%.
View our latest analysis for PG Electroplast
Does PG Electroplast Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, PG Electroplast's ROCE appears to be significantly below the 16% average in the Electronic industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how PG Electroplast 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, PG Electroplast's ROCE appears to be 9.1%, compared to 3 years ago, when its ROCE was 5.9%. This makes us wonder if the company is improving. The image below shows how PG Electroplast's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. How cyclical is PG Electroplast? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.