Today we'll look at UFO Moviez India Limited (NSE:UFO) and reflect on its potential as an investment. 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. Finally, we'll look at how its current liabilities affect its ROCE.

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

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. 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'.

So, How Do We Calculate ROCE?

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 UFO Moviez India:

0.16 = ₹859m ÷ (₹7.6b - ₹2.4b) (Based on the trailing twelve months to December 2018.)

Therefore, UFO Moviez India has an ROCE of 16%.

Check out our latest analysis for UFO Moviez India

Is UFO Moviez India's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. UFO Moviez India's ROCE appears to be substantially greater than the 5.1% average in the Entertainment industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where UFO Moviez India sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do UFO Moviez India's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

UFO Moviez India has total assets of ₹7.6b and current liabilities of ₹2.4b. Therefore its current liabilities are equivalent to approximately 31% of its total assets. With this level of current liabilities, UFO Moviez India's ROCE is boosted somewhat.

Our Take On UFO Moviez India's ROCE

While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. UFO Moviez India looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.