Does K.M. Sugar Mills Limited (NSE:KMSUGAR) Create Value For Shareholders?

Today we are going to look at K.M. Sugar Mills Limited (NSE:KMSUGAR) 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, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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 K.M. Sugar Mills:

0.11 = ₹228m ÷ (₹4.9b – ₹2.8b) (Based on the trailing twelve months to June 2019.)

So, K.M. Sugar Mills has an ROCE of 11%.

View our latest analysis for K.M. Sugar Mills

Is K.M. Sugar Mills’s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. We can see K.M. Sugar Mills’s ROCE is around the 12% average reported by the Food industry. Putting aside K.M. Sugar Mills’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.

We can see that, K.M. Sugar Mills currently has an ROCE of 11%, less than the 28% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.

NSEI:KMSUGAR Past Revenue and Net Income, September 14th 2019
NSEI:KMSUGAR Past Revenue and Net Income, September 14th 2019

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If K.M. Sugar Mills is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect K.M. Sugar Mills’s 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

K.M. Sugar Mills has total liabilities of ₹2.8b and total assets of ₹4.9b. Therefore its current liabilities are equivalent to approximately 56% of its total assets. This is a fairly high level of current liabilities, boosting K.M. Sugar Mills’s ROCE.

The Bottom Line On K.M. Sugar Mills’s ROCE

K.M. Sugar Mills’s ROCE is also pretty low (in absolute terms), making the stock look unattractive on this analysis. You might be able to find a better investment than K.M. Sugar Mills. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

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