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Today we'll look at Tata Global Beverages Limited (NSE:TATAGLOBAL) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

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 Tata Global Beverages:

0.071 = ₹6.7b ÷ (₹109b - ₹15b) (Based on the trailing twelve months to March 2019.)

Therefore, Tata Global Beverages has an ROCE of 7.1%.

Check out our latest analysis for Tata Global Beverages

Is Tata Global Beverages's ROCE Good?

One way to assess ROCE is to compare similar companies. We can see Tata Global Beverages's ROCE is meaningfully below the Food industry average of 12%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Tata Global Beverages stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.

You can see in the image below how Tata Global Beverages's ROCE compares to its industry. Click to see more on 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, 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 Tata Global Beverages.