Today we are going to look at Advani Hotels & Resorts (India) Limited (NSE:ADVANIHOTR) to see whether it might be an attractive investment prospect. 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.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. 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 measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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?
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 Advani Hotels & Resorts (India):
0.23 = ₹140m ÷ (₹760m - ₹141m) (Based on the trailing twelve months to March 2019.)
Therefore, Advani Hotels & Resorts (India) has an ROCE of 23%.
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Does Advani Hotels & Resorts (India) Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, we find that Advani Hotels & Resorts (India)'s ROCE is meaningfully better than the 7.3% average in the Hospitality industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Advani Hotels & Resorts (India) sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
It is important to remember that ROCE shows past performance, and is 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. ROCE is only a point-in-time measure. If Advani Hotels & Resorts (India) is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Advani Hotels & Resorts (India)'s Current Liabilities And Their Impact On Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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.
Advani Hotels & Resorts (India) has total assets of ₹760m and current liabilities of ₹141m. Therefore its current liabilities are equivalent to approximately 19% of its total assets. Low current liabilities are not boosting the ROCE too much.
The Bottom Line On Advani Hotels & Resorts (India)'s ROCE
This is good to see, and with a sound ROCE, Advani Hotels & Resorts (India) could be worth a closer look. Advani Hotels & Resorts (India) 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).
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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.