In This Article:
Today we’ll look at Bhagyanagar India Limited (NSE:BHAGYNAGAR) and reflect on its potential as an investment. 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. Last but not least, we’ll look at what impact its current liabilities have on 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. In general, businesses with a higher ROCE are usually better quality. 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?
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 Bhagyanagar India:
0.068 = ₹90m ÷ (₹1.7b – ₹346m) (Based on the trailing twelve months to March 2018.)
So, Bhagyanagar India has an ROCE of 6.8%.
See our latest analysis for Bhagyanagar India
Is Bhagyanagar India’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Bhagyanagar India’s ROCE is meaningfully below the Electrical industry average of 16%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how Bhagyanagar India stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
Our data shows that Bhagyanagar India currently has an ROCE of 6.8%, compared to its ROCE of 2.7% 3 years ago. This makes us think the business might be improving.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Bhagyanagar India has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Bhagyanagar India’s Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.