Is Future Enterprises Limited (NSE:FEL) Struggling With Its 6.5% Return On Capital Employed?

Today we are going to look at Future Enterprises Limited (NSE:FEL) to see whether it might be an attractive investment prospect. 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. Then we’ll determine how its current liabilities are affecting its ROCE.

What is 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. 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’.

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 Future Enterprises:

0.065 = ₹7.2b ÷ (₹141b – ₹31b) (Based on the trailing twelve months to December 2019.)

Therefore, Future Enterprises has an ROCE of 6.5%.

View our latest analysis for Future Enterprises

Does Future Enterprises Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Future Enterprises’s ROCE appears to be significantly below the 12% average in the Luxury industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Future Enterprises compares to its industry, its ROCE in absolute terms is low; especially compared to the ~6.5% available in government bonds. It is likely that there are more attractive prospects out there.

We can see that, Future Enterprises currently has an ROCE of 6.5% compared to its ROCE 3 years ago, which was 4.7%. This makes us wonder if the company is improving. The image below shows how Future Enterprises’s ROCE compares to its industry, and you can click it to see more detail on its past growth.

NSEI:FEL Past Revenue and Net Income, March 8th 2020
NSEI:FEL Past Revenue and Net Income, March 8th 2020

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 only a point-in-time measure. How cyclical is Future Enterprises? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Future Enterprises’s Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

Future Enterprises has current liabilities of ₹31b and total assets of ₹141b. Therefore its current liabilities are equivalent to approximately 22% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

The Bottom Line On Future Enterprises’s ROCE

That’s not a bad thing, however Future Enterprises has a weak ROCE and may not be an attractive investment. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.

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. Thank you for reading.