Force Motors Limited (NSE:FORCEMOT) Might Not Be A Great Investment

Today we'll look at Force Motors Limited (NSE:FORCEMOT) 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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 Force Motors:

0.049 = ₹1.1b ÷ (₹31b - ₹8.5b) (Based on the trailing twelve months to December 2019.)

So, Force Motors has an ROCE of 4.9%.

Check out our latest analysis for Force Motors

Does Force Motors Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In this analysis, Force Motors's ROCE appears meaningfully below the 12% average reported by the Machinery industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Force Motors compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.2% available in government bonds. It is likely that there are more attractive prospects out there.

We can see that, Force Motors currently has an ROCE of 4.9%, less than the 12% it reported 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Force Motors's ROCE compares to its industry. Click to see more on past growth.

It is important to remember that ROCE shows past performance, and is 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. You can check if Force Motors has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Force Motors's ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.

Force Motors has current liabilities of ₹8.5b and total assets of ₹31b. Therefore its current liabilities are equivalent to approximately 28% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.

The Bottom Line On Force Motors's ROCE

While that is good to see, Force Motors has a low ROCE and does not look attractive in this analysis. Of course, you might also be able to find a better stock than Force Motors. So you may wish to see this free collection of other companies that have grown earnings strongly.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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