In This Article:
Today we are going to look at Rajesh Exports Limited (NSE:RAJESHEXPO) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into 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.
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. In general, businesses with a higher ROCE are usually better quality. 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'.
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 Rajesh Exports:
0.16 = ₹15b ÷ (₹288b - ₹198b) (Based on the trailing twelve months to June 2019.)
Therefore, Rajesh Exports has an ROCE of 16%.
Check out our latest analysis for Rajesh Exports
Does Rajesh Exports Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Rajesh Exports's ROCE appears to be substantially greater than the 12% average in the Luxury industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Rajesh Exports compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Rajesh Exports's current ROCE of 16% is lower than its ROCE in the past, which was 31%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Rajesh Exports's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Rajesh Exports's Current Liabilities Impact 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 counteract this, we check if a company has high current liabilities, relative to its total assets.