Today we are going to look at Avanti Feeds Limited (NSE:AVANTI) 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. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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?
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 Avanti Feeds:
0.27 = ₹3.8b ÷ (₹16b - ₹2.2b) (Based on the trailing twelve months to June 2019.)
Therefore, Avanti Feeds has an ROCE of 27%.
Does Avanti Feeds Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Avanti Feeds's ROCE is meaningfully higher than the 12% average in the Food industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, Avanti Feeds's ROCE currently appears to be excellent.
Avanti Feeds's current ROCE of 27% is lower than its ROCE in the past, which was 53%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Avanti Feeds's ROCE compares to its industry. Click to see more on past growth.
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, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Avanti Feeds.
What Are Current Liabilities, And How Do They Affect Avanti Feeds'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.
Avanti Feeds has total liabilities of ₹2.2b and total assets of ₹16b. Therefore its current liabilities are equivalent to approximately 14% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.
Our Take On Avanti Feeds's ROCE
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.