In This Article:
Today we are going to look at Munjal Auto Industries Limited (NSE:MUNJALAU) to see whether it might be an attractive investment prospect. 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.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. Generally speaking a higher ROCE is better. 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.
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:
0.13 = ₹432m ÷ (₹5.6b - ₹2.2b) (Based on the trailing twelve months to June 2019.)
Therefore, Munjal Auto Industries has an ROCE of 13%.
Check out our latest analysis for Munjal Auto Industries
Is Munjal Auto Industries's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Munjal Auto Industries's ROCE appears to be around the 15% average of the Auto Components industry. Setting aside the industry comparison for now, Munjal Auto Industries's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
You can click on the image below to see (in greater detail) how Munjal Auto 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 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. How cyclical is Munjal Auto Industries? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Munjal Auto Industries's Current Liabilities Skew Its ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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.