Today we are going to look at Soni Soya Products Limited (NSE:SONISOYA) 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.
First up, we'll look at what ROCE is and how we calculate it. 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.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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 Soni Soya Products:
0.23 = ₹41m ÷ (₹551m - ₹375m) (Based on the trailing twelve months to March 2019.)
So, Soni Soya Products has an ROCE of 23%.
Check out our latest analysis for Soni Soya Products
Is Soni Soya Products's ROCE Good?
One way to assess ROCE is to compare similar companies. Soni Soya Products's ROCE appears to be substantially greater than the 12% average in the Food industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Soni Soya Products's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Soni Soya Products delivered an ROCE of 23%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. You can see in the image below how Soni Soya Products's ROCE compares to its industry. Click to see more on past growth.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Soni Soya Products is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Soni Soya Products's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.