I am writing today to help inform people who are new to the stock market and want a simplistic look at the return on Pulz Electronics Limited (NSE:PULZ) stock.
If you purchase a PULZ share you are effectively becoming a partner with many other shareholders. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. Your return is tied to PULZ’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently Pulz Electronics is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
ROCE: Explanation and Calculation
When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. To determine Pulz Electronics’s capital return we will use ROCE, which tells us how much the company makes from the capital employed in their operations (for things like machinery, wages etc). I have calculated Pulz Electronics’s ROCE for you below:
ROCE Calculation for PULZ
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = ₹2.75m ÷ (₹89.66m – ₹43.92m) = 6.02%
The calculation above shows that PULZ’s earnings were 6.02% of capital employed. A good ROCE hurdle you should aim for in your investments is 15%, which PULZ has failed to reach, meaning the company creates an unimpressive amount of earnings from capital employed.
Why is this the case?
PULZ doesn’t return an attractive amount on capital, but this will only continue if the company is unable to increase earnings or decrease current capital requirements. Because of this, it is important to look beyond the final value of PULZ’s ROCE and understand what is happening to the individual components. If you go back three years, you’ll find that PULZ’s ROCE has decreased from 7.77%. Over the same period, EBT went from ₹2.79m to ₹2.75m and capital employed has increased due to a rise in total assets employed , which means the company’s ROCE has shrunk as a result of falling earnings and simultaneous increases in capital requirements.
ROCE for PULZ investors has fallen in the last few years and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. But don’t forget, return on capital employed is a static metric that should be looked at in conjunction with other fundamental indicators like the management team. If you’re interested in diving deeper, take a look at what I’ve linked below for further information on these fundamentals and other potential investment opportunities.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Pulz Electronics’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.