Today we'll evaluate Manav Infra Projects Limited (NSE:MANAV) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting 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. 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?
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 Manav Infra Projects:
0.088 = ₹17m ÷ (₹274m - ₹79m) (Based on the trailing twelve months to March 2019.)
Therefore, Manav Infra Projects has an ROCE of 8.8%.
View our latest analysis for Manav Infra Projects
Is Manav Infra Projects's ROCE Good?
One way to assess ROCE is to compare similar companies. In this analysis, Manav Infra Projects's ROCE appears meaningfully below the 13% average reported by the Construction industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Manav Infra Projects compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.6% available in government bonds. It is likely that there are more attractive prospects out there.
We can see that, Manav Infra Projects currently has an ROCE of 8.8%, less than the 20% it reported 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Manav Infra Projects's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. How cyclical is Manav Infra Projects? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.