Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Today we are going to look at Pokarna Limited (NSE:POKARNA) 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.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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?

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 Pokarna:

0.27 = ₹1.2b ÷ (₹6.0b - ₹1.7b) (Based on the trailing twelve months to March 2019.)

So, Pokarna has an ROCE of 27%.

Check out our latest analysis for Pokarna

Does Pokarna Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Pokarna's ROCE is meaningfully higher than the 9.2% average in the Basic Materials 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, Pokarna's ROCE is currently very good.

We can see that , Pokarna currently has an ROCE of 27%, less than the 39% it reported 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Pokarna's ROCE compares to its industry. Click to see more on past growth.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Pokarna.