In This Article:
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Today we'll evaluate Procter & Gamble Hygiene and Health Care Limited (NSE:PGHH) to determine whether it could have potential as an investment idea. 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.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE 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 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.'
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 Procter & Gamble Hygiene and Health Care:
0.61 = ₹6.0b ÷ (₹18b - ₹8.1b) (Based on the trailing twelve months to December 2018.)
Therefore, Procter & Gamble Hygiene and Health Care has an ROCE of 61%.
View our latest analysis for Procter & Gamble Hygiene and Health Care
Does Procter & Gamble Hygiene and Health Care Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Procter & Gamble Hygiene and Health Care's ROCE is meaningfully higher than the 22% average in the Personal Products industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, Procter & Gamble Hygiene and Health Care's ROCE currently appears to be excellent.
Our data shows that Procter & Gamble Hygiene and Health Care currently has an ROCE of 61%, compared to its ROCE of 38% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.
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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Procter & Gamble Hygiene and Health Care.