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Should You Like Hatsun Agro Product Limited’s (NSE:HATSUNPP) High Return On Capital Employed?

Simply Wall St

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Today we'll look at Hatsun Agro Product Limited (NSE:HATSUNPP) and reflect on its potential as an investment. 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.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding 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. Generally speaking a higher ROCE is better. 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 Hatsun Agro Product:

0.20 = ₹2.7b ÷ (₹22b - ₹9.0b) (Based on the trailing twelve months to June 2019.)

Therefore, Hatsun Agro Product has an ROCE of 20%.

View our latest analysis for Hatsun Agro Product

Does Hatsun Agro Product Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Hatsun Agro Product's ROCE is meaningfully better than the 12% average in the Food industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Hatsun Agro Product's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

We can see that , Hatsun Agro Product currently has an ROCE of 20%, less than the 41% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Hatsun Agro Product's past growth compares to other companies.

NSEI:HATSUNPP Past Revenue and Net Income, July 20th 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Hatsun Agro Product.

What Are Current Liabilities, And How Do They Affect Hatsun Agro Product's ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Hatsun Agro Product has total assets of ₹22b and current liabilities of ₹9.0b. Therefore its current liabilities are equivalent to approximately 40% of its total assets. Hatsun Agro Product has a middling amount of current liabilities, increasing its ROCE somewhat.

Our Take On Hatsun Agro Product's ROCE

With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. There might be better investments than Hatsun Agro Product out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

I will like Hatsun Agro Product better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.