Is There More To Nava Bharat Ventures Limited (NSE:NBVENTURES) Than Its 14% Returns On Capital?

Today we'll look at Nava Bharat Ventures Limited (NSE:NBVENTURES) and reflect on its potential as an investment. 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 up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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 Nava Bharat Ventures:

0.14 = ₹11b ÷ (₹87b - ₹11b) (Based on the trailing twelve months to June 2019.)

Therefore, Nava Bharat Ventures has an ROCE of 14%.

View our latest analysis for Nava Bharat Ventures

Does Nava Bharat Ventures Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. It appears that Nava Bharat Ventures's ROCE is fairly close to the Industrials industry average of 16%. Setting aside the industry comparison for now, Nava Bharat Ventures's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

We can see that , Nava Bharat Ventures currently has an ROCE of 14% compared to its ROCE 3 years ago, which was 4.1%. This makes us think the business might be improving. The image below shows how Nava Bharat Ventures's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NSEI:NBVENTURES Past Revenue and Net Income, August 20th 2019
NSEI:NBVENTURES Past Revenue and Net Income, August 20th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How Nava Bharat Ventures'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 counter this, investors can check if a company has high current liabilities relative to total assets.

Nava Bharat Ventures has total liabilities of ₹11b and total assets of ₹87b. Therefore its current liabilities are equivalent to approximately 13% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

The Bottom Line On Nava Bharat Ventures's ROCE

With that in mind, we're not overly impressed with Nava Bharat Ventures's ROCE, so it may not be the most appealing prospect. 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 are like me, then you will not want to miss this free list of growing companies that insiders are 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 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.