Today we are going to look at Madhya Bharat Agro Products Limited (NSE:MBAPL) 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. 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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. 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 Madhya Bharat Agro Products:
0.15 = ₹201m ÷ (₹1.6b - ₹294m) (Based on the trailing twelve months to March 2019.)
Therefore, Madhya Bharat Agro Products has an ROCE of 15%.
Does Madhya Bharat Agro Products Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. It appears that Madhya Bharat Agro Products's ROCE is fairly close to the Chemicals industry average of 17%. Aside from the industry comparison, Madhya Bharat Agro Products's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
In our analysis, Madhya Bharat Agro Products's ROCE appears to be 15%, compared to 3 years ago, when its ROCE was 8.0%. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Madhya Bharat Agro Products's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. ROCE is only a point-in-time measure. You can check if Madhya Bharat Agro Products has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Madhya Bharat Agro Products's 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Madhya Bharat Agro Products has total assets of ₹1.6b and current liabilities of ₹294m. As a result, its current liabilities are equal to approximately 18% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.
Our Take On Madhya Bharat Agro Products's ROCE
That said, Madhya Bharat Agro Products's ROCE is mediocre, there may be more attractive investments around. You might be able to find a better investment than Madhya Bharat Agro Products. 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 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.