In This Article:
Today we'll look at Sreeleathers Limited (NSE:SREEL) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect 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. In general, businesses with a higher ROCE are usually better quality. 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?
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 Sreeleathers:
0.13 = ₹394m ÷ (₹3.2b - ₹234m) (Based on the trailing twelve months to June 2019.)
Therefore, Sreeleathers has an ROCE of 13%.
Check out our latest analysis for Sreeleathers
Does Sreeleathers Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Sreeleathers's ROCE is meaningfully better than the 2.9% average in the Retail Distributors 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. Aside from the industry comparison, Sreeleathers's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
We can see that , Sreeleathers currently has an ROCE of 13% compared to its ROCE 3 years ago, which was 7.2%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Sreeleathers'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. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Sreeleathers is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.