Today we'll look at Ajooni Biotech Limited (NSE:AJOONI) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we'll look at what ROCE is and how we calculate it. 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. 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 Ajooni Biotech:

0.044 = ₹7.2m ÷ (₹182m - ₹19m) (Based on the trailing twelve months to March 2019.)

Therefore, Ajooni Biotech has an ROCE of 4.4%.

View our latest analysis for Ajooni Biotech

Is Ajooni Biotech's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Ajooni Biotech's ROCE appears meaningfully below the 12% average reported by the Food industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Ajooni Biotech'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.

Ajooni Biotech's current ROCE of 4.4% is lower than 3 years ago, when the company reported a 21% ROCE. Therefore we wonder if the company is facing new headwinds. The image below shows how Ajooni Biotech's ROCE compares to its industry, and you can click it to see more detail on its past growth.

When considering this metric, keep in mind that it is backwards looking, and 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. ROCE is only a point-in-time measure. If Ajooni Biotech is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.