A Close Look At Silgo Retail Limited’s (NSE:SILGO) 20% ROCE

Today we are going to look at Silgo Retail Limited (NSE:SILGO) 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. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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 Silgo Retail:

0.20 = ₹19m ÷ (₹106m - ₹13m) (Based on the trailing twelve months to March 2019.)

Therefore, Silgo Retail has an ROCE of 20%.

See our latest analysis for Silgo Retail

Does Silgo Retail Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Silgo Retail's ROCE is meaningfully better than the 12% average in the Luxury industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Silgo Retail's ROCE in absolute terms currently looks quite high.

You can see in the image below how Silgo Retail'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 only a point-in-time measure. You can check if Silgo Retail has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Silgo Retail'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.

Silgo Retail has total liabilities of ₹13m and total assets of ₹106m. Therefore its current liabilities are equivalent to approximately 12% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.

The Bottom Line On Silgo Retail's ROCE

With low current liabilities and a high ROCE, Silgo Retail could be worthy of further investigation. Silgo Retail 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 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.