Today we are going to look at Globe Textiles (India) Limited (NSE:GLOBE) to see whether it might be an attractive investment prospect. 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.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared 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 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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?
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 Globe Textiles (India):
0.29 = ₹130m ÷ (₹1.4b - ₹938m) (Based on the trailing twelve months to March 2019.)
Therefore, Globe Textiles (India) has an ROCE of 29%.
See our latest analysis for Globe Textiles (India)
Does Globe Textiles (India) Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Globe Textiles (India)'s ROCE is meaningfully better than the 12% average in the Luxury industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Putting aside its position relative to its industry for now, in absolute terms, Globe Textiles (India)'s ROCE is currently very good.
In our analysis, Globe Textiles (India)'s ROCE appears to be 29%, compared to 3 years ago, when its ROCE was 23%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Globe Textiles (India)'s past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Globe Textiles (India) has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.