In This Article:
Today we’ll look at Kaveri Seed Company Limited (NSE:KSCL) 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 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. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
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 Kaveri Seed:
0.19 = ₹2.0b ÷ (₹14b – ₹4.2b) (Based on the trailing twelve months to March 2018.)
So, Kaveri Seed has an ROCE of 19%.
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Is Kaveri Seed’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Kaveri Seed’s ROCE appears to be substantially greater 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 Kaveri Seed’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, Kaveri Seed currently has an ROCE of 19%, less than the 39% it reported 3 years ago. So investors might consider if it has had issues recently.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Kaveri Seed.