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Today we are going to look at Suumaya Lifestyle Limited (NSE:SUULD) 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.
First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the 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?
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 Suumaya Lifestyle:
0.082 = ₹21m ÷ (₹518m – ₹260m) (Based on the trailing twelve months to March 2018.)
Therefore, Suumaya Lifestyle has an ROCE of 8.2%.
Check out our latest analysis for Suumaya Lifestyle
Is Suumaya Lifestyle’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Suumaya Lifestyle’s ROCE is meaningfully below the Luxury industry average of 11%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Suumaya Lifestyle compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.6% available in government bonds. There are potentially more appealing investments elsewhere.
In our analysis, Suumaya Lifestyle’s ROCE appears to be 8.2%, compared to 3 years ago, when its ROCE was 0.7%. This makes us wonder if the company is improving.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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 only a point-in-time measure. You can check if Suumaya Lifestyle has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.