Are Sakuma Exports Limited’s (NSE:SAKUMA) High Returns Really That Great?

Simply Wall St

Tue, Mar 26, 2019, 8:09 PM

Today we are going to look at Sakuma Exports Limited (NSE:SAKUMA) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

Firstly, we'll go over how we calculate ROCE. 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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'.

So, How Do We Calculate ROCE?

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 Sakuma Exports:

0.22 = ₹568m ÷ (₹8.0b - ₹5.4b) (Based on the trailing twelve months to March 2018.)

So, Sakuma Exports has an ROCE of 22%.

See our latest analysis for Sakuma Exports

Is Sakuma Exports's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Sakuma Exports's ROCE is meaningfully better than the 7.7% average in the Consumer Retailing 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. Independently of how Sakuma Exports compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

Our data shows that Sakuma Exports currently has an ROCE of 22%, compared to its ROCE of 15% 3 years ago. This makes us think the business might be improving.

NSEI:SAKUMA Past Revenue and Net Income, March 27th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.