Today we are going to look at Thangamayil Jewellery Limited (NSE:THANGAMAYL) to see whether it might be an attractive investment prospect. 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. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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.’
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 Thangamayil Jewellery:
0.27 = ₹519m ÷ (₹6.3b – ₹4.1b) (Based on the trailing twelve months to September 2018.)
So, Thangamayil Jewellery has an ROCE of 27%.
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Does Thangamayil Jewellery Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Thangamayil Jewellery’s ROCE appears to be substantially greater than the 14% average in the Specialty Retail 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, Thangamayil Jewellery’s ROCE in absolute terms currently looks quite high.
As we can see, Thangamayil Jewellery currently has an ROCE of 27% compared to its ROCE 3 years ago, which was 14%. This makes us think the business might be improving.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Thangamayil Jewellery? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Thangamayil Jewellery’s 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 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.
Thangamayil Jewellery has total liabilities of ₹4.1b and total assets of ₹6.3b. Therefore its current liabilities are equivalent to approximately 65% of its total assets. While a high level of current liabilities boosts its ROCE, Thangamayil Jewellery’s returns are still very good.
The Bottom Line On Thangamayil Jewellery’s ROCE
So we would be interested in doing more research here — there may be an opportunity! You might be able to find a better buy than Thangamayil Jewellery. 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 Thangamayil Jewellery 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.