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Today we are going to look at Opto Circuits (India) Limited (NSE:OPTOCIRCUI) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding 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. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
How Do You Calculate Return On Capital Employed?
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 Opto Circuits (India):
0.042 = ₹530m ÷ (₹21b - ₹8.3b) (Based on the trailing twelve months to March 2019.)
So, Opto Circuits (India) has an ROCE of 4.2%.
See our latest analysis for Opto Circuits (India)
Does Opto Circuits (India) Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Opto Circuits (India)'s ROCE appears meaningfully below the 8.8% average reported by the Medical Equipment industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Opto Circuits (India) stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
Opto Circuits (India) has an ROCE of 4.2%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That suggests the business has returned to profitability.
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. ROCE is, after all, simply a snap shot of a single year. How cyclical is Opto Circuits (India)? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.