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Today we'll evaluate Procter & Gamble Hygiene and Health Care Limited (NSE:PGHH) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE 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. All else being equal, a better business will have a higher ROCE. 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.'
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 Procter & Gamble Hygiene and Health Care:
0.61 = ₹6.0b ÷ (₹18b - ₹8.1b) (Based on the trailing twelve months to December 2018.)
Therefore, Procter & Gamble Hygiene and Health Care has an ROCE of 61%.
Does Procter & Gamble Hygiene and Health Care Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Procter & Gamble Hygiene and Health Care's ROCE is meaningfully higher than the 22% average in the Personal Products 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, Procter & Gamble Hygiene and Health Care's ROCE currently appears to be excellent.
Our data shows that Procter & Gamble Hygiene and Health Care currently has an ROCE of 61%, compared to its ROCE of 38% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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, 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 Procter & Gamble Hygiene and Health Care.
How Procter & Gamble Hygiene and Health Care's Current Liabilities Impact 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Procter & Gamble Hygiene and Health Care has total liabilities of ₹8.1b and total assets of ₹18b. Therefore its current liabilities are equivalent to approximately 45% of its total assets. Procter & Gamble Hygiene and Health Care has a medium level of current liabilities, boosting its ROCE somewhat.
Our Take On Procter & Gamble Hygiene and Health Care's ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. Procter & Gamble Hygiene and Health Care 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.
I will like Procter & Gamble Hygiene and Health Care 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 email@example.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.