In This Article:
Today we are going to look at Aditya Birla Fashion and Retail Limited (NSE:ABFRL) to see whether it might be an attractive investment prospect. 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, 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.
Return On Capital Employed (ROCE): What is it?
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. In brief, it is a useful tool, but it is not without drawbacks. 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 Aditya Birla Fashion and Retail:
0.14 = ₹3.4b ÷ (₹66b - ₹42b) (Based on the trailing twelve months to June 2019.)
So, Aditya Birla Fashion and Retail has an ROCE of 14%.
See our latest analysis for Aditya Birla Fashion and Retail
Does Aditya Birla Fashion and Retail Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, Aditya Birla Fashion and Retail's ROCE appears to be around the 12% average of the Luxury industry. Setting aside the industry comparison for now, Aditya Birla Fashion and Retail'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.
Our data shows that Aditya Birla Fashion and Retail currently has an ROCE of 14%, compared to its ROCE of 6.0% 3 years ago. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Aditya Birla Fashion and Retail's past growth compares to other companies.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Aditya Birla Fashion and Retail.