Today we'll evaluate JMC Projects (India) Limited (NSE:JMCPROJECT) to determine whether it could have potential as an investment idea. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, 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 measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 JMC Projects (India):
0.099 = ₹2.7b ÷ (₹45b - ₹18b) (Based on the trailing twelve months to March 2018.)
Therefore, JMC Projects (India) has an ROCE of 9.9%.
View our latest analysis for JMC Projects (India)
Does JMC Projects (India) Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see JMC Projects (India)'s ROCE is meaningfully below the Construction industry average of 13%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside JMC Projects (India)'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.
As we can see, JMC Projects (India) currently has an ROCE of 9.9% compared to its ROCE 3 years ago, which was 5.5%. This makes us wonder if the company is improving.
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 JMC Projects (India).
JMC Projects (India)'s Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.