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Today we’ll look at Uravi T and Wedge Lamps Limited (NSE:URAVI) 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 of all, we’ll work out how to calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding 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. In general, businesses with a higher ROCE are usually better quality. 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?
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 Uravi T and Wedge Lamps:
0.21 = ₹52m ÷ (₹422m – ₹171m) (Based on the trailing twelve months to March 2019.)
Therefore, Uravi T and Wedge Lamps has an ROCE of 21%.
Is Uravi T and Wedge Lamps’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Uravi T and Wedge Lamps’s ROCE is meaningfully better than the 16% average in the Auto Components industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Uravi T and Wedge Lamps sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Uravi T and Wedge Lamps’s current ROCE of 21% is lower than 3 years ago, when the company reported a 30% ROCE. So investors might consider if it has had issues recently.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. If Uravi T and Wedge Lamps is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Uravi T and Wedge Lamps’s Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Uravi T and Wedge Lamps has total liabilities of ₹171m and total assets of ₹422m. Therefore its current liabilities are equivalent to approximately 41% of its total assets. With this level of current liabilities, Uravi T and Wedge Lamps’s ROCE is boosted somewhat.
The Bottom Line On Uravi T and Wedge Lamps’s ROCE
Uravi T and Wedge Lamps’s ROCE does look good, but the level of current liabilities also contribute to that. Uravi T and Wedge Lamps looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.