Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today we’ll look at Jamna Auto Industries Limited (NSE:JAMNAAUTO) and reflect on its potential as an investment. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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.’
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 Jamna Auto Industries:
0.42 = ₹2.3b ÷ (₹11b – ₹5.3b) (Based on the trailing twelve months to March 2019.)
So, Jamna Auto Industries has an ROCE of 42%.
Does Jamna Auto Industries Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, Jamna Auto Industries’s ROCE is meaningfully higher than the 16% average in the Auto Components industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Jamna Auto Industries’s ROCE currently appears to be excellent.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Jamna Auto Industries.
What Are Current Liabilities, And How Do They Affect Jamna Auto Industries’s ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Jamna Auto Industries has total liabilities of ₹5.3b and total assets of ₹11b. As a result, its current liabilities are equal to approximately 49% of its total assets. Jamna Auto Industries has a medium level of current liabilities, boosting its ROCE somewhat.
What We Can Learn From Jamna Auto Industries’s ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. Jamna Auto Industries 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.