In This Article:
Today we’ll evaluate GRP Limited (NSE:GRPLTD) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. 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 measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. 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’.
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 GRP:
0.04 = ₹60m ÷ (₹2.3b – ₹774m) (Based on the trailing twelve months to March 2018.)
Therefore, GRP has an ROCE of 4.0%.
See our latest analysis for GRP
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Does GRP Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see GRP’s ROCE is meaningfully below the Auto Components industry average of 17%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside GRP’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.
GRP’s current ROCE of 4.0% is lower than 3 years ago, when the company reported a 5.4% ROCE. Therefore we wonder if the company is facing new headwinds.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if GRP has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.