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Today we’ll evaluate Kingfa Science & Technology (India) Limited (NSE:KINGFA) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we’ll work out how to calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding 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. Ultimately, it is a useful but imperfect metric. 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’.
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 Kingfa Science & Technology (India):
0.091 = ₹350m ÷ (₹5.3b – ₹2.1b) (Based on the trailing twelve months to December 2018.)
Therefore, Kingfa Science & Technology (India) has an ROCE of 9.1%.
Does Kingfa Science & Technology (India) Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see Kingfa Science & Technology (India)’s ROCE is meaningfully below the Chemicals industry average of 17%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how Kingfa Science & Technology (India) stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
Kingfa Science & Technology (India)’s current ROCE of 9.1% is lower than 3 years ago, when the company reported a 19% ROCE. This makes us wonder if the business is facing new challenges.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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. How cyclical is Kingfa Science & Technology (India)? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Kingfa Science & Technology (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. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Kingfa Science & Technology (India) has total assets of ₹5.3b and current liabilities of ₹2.1b. Therefore its current liabilities are equivalent to approximately 39% of its total assets. With a medium level of current liabilities boosting the ROCE a little, Kingfa Science & Technology (India)’s low ROCE is unappealing.
Our Take On Kingfa Science & Technology (India)’s ROCE
There are likely better investments out there. You might be able to find a better buy than Kingfa Science & Technology (India). 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).
I will like Kingfa Science & Technology (India) better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.