Here’s What Lypsa Gems & Jewellery Limited’s (NSE:LYPSAGEMS) Return On Capital Can Tell Us
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Today we'll evaluate Lypsa Gems & Jewellery Limited (NSE:LYPSAGEMS) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. 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'.
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 Lypsa Gems & Jewellery:
0.13 = ₹189m ÷ (₹3.7b - ₹2.3b) (Based on the trailing twelve months to December 2018.)
Therefore, Lypsa Gems & Jewellery has an ROCE of 13%.
Check out our latest analysis for Lypsa Gems & Jewellery
Does Lypsa Gems & Jewellery Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Lypsa Gems & Jewellery's ROCE appears to be around the 11% average of the Luxury industry. Setting aside the industry comparison for now, Lypsa Gems & Jewellery's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Lypsa Gems & Jewellery's current ROCE of 13% is lower than 3 years ago, when the company reported a 49% ROCE. So investors might consider if it has had issues recently.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Lypsa Gems & Jewellery is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do Lypsa Gems & Jewellery's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Lypsa Gems & Jewellery has total liabilities of ₹2.3b and total assets of ₹3.7b. Therefore its current liabilities are equivalent to approximately 62% of its total assets. Lypsa Gems & Jewellery's current liabilities are fairly high, making its ROCE look better than otherwise.
Our Take On Lypsa Gems & Jewellery's ROCE
Despite this, the company also has a uninspiring ROCE, which is not an ideal combination in this analysis. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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 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.
