In This Article:
Today we are going to look at Shirpur Gold Refinery Limited (NSE:SHIRPUR-G) 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. Last but not least, we'll look at what impact its current liabilities have on 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. All else being equal, a better business will have a higher ROCE. 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'.
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 Shirpur Gold Refinery:
0.12 = ₹550m ÷ (₹9.8b - ₹5.1b) (Based on the trailing twelve months to June 2019.)
Therefore, Shirpur Gold Refinery has an ROCE of 12%.
See our latest analysis for Shirpur Gold Refinery
Does Shirpur Gold Refinery Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. It appears that Shirpur Gold Refinery's ROCE is fairly close to the Metals and Mining industry average of 14%. Aside from the industry comparison, Shirpur Gold Refinery's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
You can see in the image below how Shirpur Gold Refinery'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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. We note Shirpur Gold Refinery could be considered a cyclical business. How cyclical is Shirpur Gold Refinery? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.