Today we are going to look at Madhya Bharat Agro Products Limited (NSE:MBAPL) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we'll go over how we 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. Overall, it is a valuable metric that has its flaws. 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'.

How Do You Calculate Return On Capital Employed?

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 Madhya Bharat Agro Products:

0.15 = ₹201m ÷ (₹1.6b - ₹294m) (Based on the trailing twelve months to March 2019.)

Therefore, Madhya Bharat Agro Products has an ROCE of 15%.

View our latest analysis for Madhya Bharat Agro Products

Does Madhya Bharat Agro Products Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. It appears that Madhya Bharat Agro Products's ROCE is fairly close to the Chemicals industry average of 17%. Aside from the industry comparison, Madhya Bharat Agro Products'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, Madhya Bharat Agro Products's ROCE appears to be 15%, compared to 3 years ago, when its ROCE was 8.0%. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Madhya Bharat Agro Products's ROCE compares to its industry, and you can click it to see more detail on its 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 only a point-in-time measure. You can check if Madhya Bharat Agro Products has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.