In This Article:
Today we’ll evaluate Hatsun Agro Product Limited (NSE:HATSUN) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, 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.
Understanding Return On Capital Employed (ROCE)
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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 Hatsun Agro Product:
0.18 = ₹2.0b ÷ (₹21b – ₹8.5b) (Based on the trailing twelve months to September 2018.)
So, Hatsun Agro Product has an ROCE of 18%.
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Does Hatsun Agro Product Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Hatsun Agro Product’s ROCE is meaningfully better than the 14% average in the Food industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Hatsun Agro Product’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
As we can see, Hatsun Agro Product currently has an ROCE of 18%, less than the 33% it reported 3 years ago. So investors might consider if it has had issues recently.
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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Hatsun Agro Product.