In This Article:
Today we'll evaluate JK Tyre & Industries Limited (NSE:JKTYRE) 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.
First, 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.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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?
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 JK Tyre & Industries:
0.10 = ₹7.0b ÷ (₹113b - ₹46b) (Based on the trailing twelve months to June 2019.)
So, JK Tyre & Industries has an ROCE of 10%.
View our latest analysis for JK Tyre & Industries
Is JK Tyre & Industries's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, JK Tyre & Industries's ROCE appears to be significantly below the 15% average in the Auto Components industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside JK Tyre & Industries's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
We can see that, JK Tyre & Industries currently has an ROCE of 10%, less than the 23% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how JK Tyre & Industries's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for JK Tyre & Industries.