U.S. Markets closed

# Should You Like Jiya Eco-Products Limited’s (NSE:JIYAECO) High Return On Capital Employed?

Today we'll look at Jiya Eco-Products Limited (NSE:JIYAECO) and reflect on its potential as an investment. 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. 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.

### Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its 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.'

### So, How Do We Calculate ROCE?

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 Jiya Eco-Products:

0.36 = ₹318m ÷ (₹1.4b - ₹561m) (Based on the trailing twelve months to June 2019.)

Therefore, Jiya Eco-Products has an ROCE of 36%.

### Does Jiya Eco-Products Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, we find that Jiya Eco-Products's ROCE is meaningfully better than the 10% average in the Oil and Gas industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Jiya Eco-Products's ROCE is currently very good.

Our data shows that Jiya Eco-Products currently has an ROCE of 36%, compared to its ROCE of 19% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Jiya Eco-Products's ROCE compares to its industry. Click to see more on past growth.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Remember that most companies like Jiya Eco-Products are cyclical businesses. If Jiya Eco-Products is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

### Do Jiya Eco-Products's Current Liabilities Skew Its ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Jiya Eco-Products has total assets of ₹1.4b and current liabilities of ₹561m. As a result, its current liabilities are equal to approximately 39% of its total assets. Jiya Eco-Products's ROCE is boosted somewhat by its middling amount of current liabilities.

### Our Take On Jiya Eco-Products's ROCE

Even so, it has a great ROCE, and could be an attractive prospect for further research. Jiya Eco-Products shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.