In This Article:
Today we'll evaluate InterGlobe Aviation Limited (NSE:INDIGO) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. 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.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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'.
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 InterGlobe Aviation:
0.059 = ₹10b ÷ (₹250b - ₹80b) (Based on the trailing twelve months to June 2019.)
Therefore, InterGlobe Aviation has an ROCE of 5.9%.
Check out our latest analysis for InterGlobe Aviation
Is InterGlobe Aviation's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see InterGlobe Aviation's ROCE is meaningfully below the Airlines industry average of 9.8%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how InterGlobe Aviation compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.6% available in government bonds. There are potentially more appealing investments elsewhere.
InterGlobe Aviation's current ROCE of 5.9% is lower than its ROCE in the past, which was 27%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how InterGlobe Aviation's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for InterGlobe Aviation.