Today we are going to look at Moksh Ornaments Limited (NSE:MOKSH) 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. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 Moksh Ornaments:

0.29 = ₹89m ÷ (₹847m - ₹541m) (Based on the trailing twelve months to March 2019.)

So, Moksh Ornaments has an ROCE of 29%.

Check out our latest analysis for Moksh Ornaments

Does Moksh Ornaments Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Moksh Ornaments's ROCE is meaningfully higher than the 12% average in the Luxury industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, Moksh Ornaments's ROCE currently appears to be excellent.

You can click on the image below to see (in greater detail) how Moksh Ornaments's past growth compares to other companies.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Moksh Ornaments is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Do Moksh Ornaments's Current Liabilities Skew 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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Moksh Ornaments has total assets of ₹847m and current liabilities of ₹541m. Therefore its current liabilities are equivalent to approximately 64% of its total assets. While a high level of current liabilities boosts its ROCE, Moksh Ornaments's returns are still very good.

The Bottom Line On Moksh Ornaments's ROCE

In my book, this business could be worthy of further research. There might be better investments than Moksh Ornaments out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

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.