In This Article:
Today we'll evaluate Jagran Prakashan Limited (NSE:JAGRAN) 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. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 Jagran Prakashan:
0.16 = ₹3.8b ÷ (₹31b - ₹7.1b) (Based on the trailing twelve months to June 2019.)
Therefore, Jagran Prakashan has an ROCE of 16%.
View our latest analysis for Jagran Prakashan
Is Jagran Prakashan's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Jagran Prakashan's ROCE appears to be around the 16% average of the Media industry. Independently of how Jagran Prakashan compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Jagran Prakashan's current ROCE of 16% is lower than 3 years ago, when the company reported a 23% ROCE. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Jagran Prakashan's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is 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. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do Jagran Prakashan's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.