In This Article:
Today we are going to look at Bannari Amman Sugars Limited (NSE:BANARISUG) 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. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 Bannari Amman Sugars:
0.09 = ₹1.3b ÷ (₹22b - ₹7.5b) (Based on the trailing twelve months to June 2019.)
Therefore, Bannari Amman Sugars has an ROCE of 9.0%.
Check out our latest analysis for Bannari Amman Sugars
Does Bannari Amman Sugars Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, Bannari Amman Sugars's ROCE appears to be significantly below the 12% average in the Food industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside Bannari Amman Sugars's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
Bannari Amman Sugars's current ROCE of 9.0% is lower than its ROCE in the past, which was 14%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how Bannari Amman Sugars's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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, after all, simply a snap shot of a single year. You can check if Bannari Amman Sugars has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.