In This Article:
Today we'll look at Surana Solar Limited (NSE:SURANASOL) 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.
Firstly, we'll go over how we calculate ROCE. 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.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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?
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 Surana Solar:
0.025 = ₹19m ÷ (₹791m - ₹50m) (Based on the trailing twelve months to June 2019.)
Therefore, Surana Solar has an ROCE of 2.5%.
See our latest analysis for Surana Solar
Does Surana Solar Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Surana Solar's ROCE appears to be significantly below the 9.6% average in the Semiconductor industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Surana Solar's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
Surana Solar's current ROCE of 2.5% is lower than 3 years ago, when the company reported a 9.4% ROCE. This makes us wonder if the business is facing new challenges. The image below shows how Surana Solar's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. ROCE is only a point-in-time measure. How cyclical is Surana Solar? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.