Today we’ll evaluate Lypsa Gems & Jewellery Limited (NSE:LYPSAGEMS) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Last but not least, we’ll look at what impact its current liabilities have on 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. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.
How Do You Calculate Return On Capital Employed?
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 Lypsa Gems & Jewellery:
0.069 = ₹96m ÷ (₹3.7b – ₹2.3b) (Based on the trailing twelve months to June 2019.)
Therefore, Lypsa Gems & Jewellery has an ROCE of 6.9%.
Is Lypsa Gems & Jewellery’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Lypsa Gems & Jewellery’s ROCE appears to be significantly below the 12% average in the Luxury industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Aside from the industry comparison, Lypsa Gems & Jewellery’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
We can see that, Lypsa Gems & Jewellery currently has an ROCE of 6.9%, less than the 26% it reported 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Lypsa Gems & Jewellery’s ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. You can check if Lypsa Gems & Jewellery has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Lypsa Gems & Jewellery’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. 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.
Lypsa Gems & Jewellery has total liabilities of ₹2.3b and total assets of ₹3.7b. As a result, its current liabilities are equal to approximately 62% of its total assets. With a high level of current liabilities, Lypsa Gems & Jewellery will experience a boost to its ROCE.
The Bottom Line On Lypsa Gems & Jewellery’s ROCE
Even so, the company reports a mediocre ROCE, and there may be better investments out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
I will like Lypsa Gems & Jewellery better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.