In This Article:
Today we'll look at Sagardeep Alloys Limited (NSE:SAGARDEEP) 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. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
What is 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. Generally speaking a higher ROCE is better. 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 Sagardeep Alloys:
0.098 = ₹27m ÷ (₹460m - ₹190m) (Based on the trailing twelve months to March 2019.)
So, Sagardeep Alloys has an ROCE of 9.8%.
See our latest analysis for Sagardeep Alloys
Is Sagardeep Alloys's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Sagardeep Alloys's ROCE is meaningfully below the Metals and Mining industry average of 14%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Sagardeep Alloys compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.6% available in government bonds. It is likely that there are more attractive prospects out there.
We can see that, Sagardeep Alloys currently has an ROCE of 9.8%, less than the 16% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how Sagardeep Alloys's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. We note Sagardeep Alloys could be considered a cyclical business. You can check if Sagardeep Alloys has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.