In This Article:
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today we'll look at Nahar Poly Films Limited (NSE:NAHARPOLY) 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.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared 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 measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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. 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?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Nahar Poly Films:
0.028 = ₹129m ÷ (₹4.7b - ₹106m) (Based on the trailing twelve months to March 2019.)
So, Nahar Poly Films has an ROCE of 2.8%.
See our latest analysis for Nahar Poly Films
Is Nahar Poly Films's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Nahar Poly Films's ROCE is meaningfully below the Chemicals industry average of 17%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Nahar Poly Films's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
Nahar Poly Films's current ROCE of 2.8% is lower than its ROCE in the past, which was 9.0%, 3 years ago. This makes us wonder if the business is facing new challenges.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. ROCE is, after all, simply a snap shot of a single year. If Nahar Poly Films is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.