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Today we'll look at Jindal Worldwide Limited (NSE:JINDWORLD) and reflect on its potential as an investment. 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting 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. All else being equal, a better business will have a higher ROCE. 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 Jindal Worldwide:
0.15 = ₹1.1b ÷ (₹14b - ₹6.8b) (Based on the trailing twelve months to March 2019.)
So, Jindal Worldwide has an ROCE of 15%.
See our latest analysis for Jindal Worldwide
Is Jindal Worldwide's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Jindal Worldwide's ROCE is meaningfully better than the 12% average in the Luxury industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Aside from the industry comparison, Jindal Worldwide'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.
Jindal Worldwide's current ROCE of 15% is lower than 3 years ago, when the company reported a 21% ROCE. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Jindal Worldwide'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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Jindal Worldwide is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.