Today we are going to look at CKP Products Limited (NSE:CKPPRODUCT) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding 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. In brief, it is a useful tool, but it is not without drawbacks. 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'.
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 CKP Products:
0.13 = ₹20m ÷ (₹387m - ₹234m) (Based on the trailing twelve months to March 2019.)
Therefore, CKP Products has an ROCE of 13%.
Check out our latest analysis for CKP Products
Is CKP Products's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, CKP Products's ROCE appears to be around the 13% average of the Consumer Retailing industry. Setting aside the industry comparison for now, CKP Products's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
CKP Products's current ROCE of 13% is lower than 3 years ago, when the company reported a 45% ROCE. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how CKP Products's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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 CKP Products? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.