Evaluating Genus Power Infrastructures Limited’s (NSE:GENUSPOWER) Investments In Its Business

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Today we are going to look at Genus Power Infrastructures Limited (NSE:GENUSPOWER) 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 up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting 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. In brief, it is a useful tool, but it is not without drawbacks. 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 Genus Power Infrastructures:

0.098 = ₹771m ÷ (₹13b – ₹5.3b) (Based on the trailing twelve months to March 2018.)

So, Genus Power Infrastructures has an ROCE of 9.8%.

See our latest analysis for Genus Power Infrastructures

Does Genus Power Infrastructures Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Genus Power Infrastructures’s ROCE appears to be around the 9.8% average of the Electronic industry. Regardless of how Genus Power Infrastructures stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.

Genus Power Infrastructures’s current ROCE of 9.8% is lower than its ROCE in the past, which was 27%, 3 years ago. This makes us wonder if the business is facing new challenges.

NSEI:GENUSPOWER Past Revenue and Net Income, May 1st 2019
NSEI:GENUSPOWER Past Revenue and Net Income, May 1st 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Genus Power Infrastructures.

How Genus Power Infrastructures’s Current Liabilities Impact 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Genus Power Infrastructures has total assets of ₹13b and current liabilities of ₹5.3b. Therefore its current liabilities are equivalent to approximately 40% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Genus Power Infrastructures’s ROCE is concerning.

The Bottom Line On Genus Power Infrastructures’s ROCE

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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.