In This Article:
Today we’ll look at Munjal Auto Industries Limited (NSE:MUNJALAU) and reflect on its potential as an investment. 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. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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 Munjal Auto Industries:
0.16 = ₹543m ÷ (₹5.4b – ₹2.4b) (Based on the trailing twelve months to September 2018.)
So, Munjal Auto Industries has an ROCE of 16%.
Check out our latest analysis for Munjal Auto Industries
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Does Munjal Auto Industries Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Munjal Auto Industries’s ROCE is around the 17% average reported by the Auto Components industry. Independently of how Munjal Auto Industries compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
In our analysis, Munjal Auto Industries’s ROCE appears to be 16%, compared to 3 years ago, when its ROCE was 12%. This makes us wonder if the company is improving.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. You can check if Munjal Auto Industries has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Munjal Auto Industries’s Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.