Yahoo Finance Is There More To KNR Constructions Limited (NSE:KNRCON) Than Its 14%Returns On Capital?
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today we’ll look at KNR Constructions Limited (NSE:KNRCON) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared 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 amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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 KNR Constructions:
0.14 = ₹2.6b ÷ (₹26b – ₹7.3b) (Based on the trailing twelve months to March 2018.)
Therefore, KNR Constructions has an ROCE of 14%.
See our latest analysis for KNR Constructions
Does KNR Constructions Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, KNR Constructions’s ROCE appears to be around the 12% average of the Construction industry. Setting aside the industry comparison for now, KNR Constructions’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.
In our analysis, KNR Constructions’s ROCE appears to be 14%, compared to 3 years ago, when its ROCE was 4.5%. This makes us wonder if the company is improving.
It is important to remember that ROCE shows past performance, and is 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for KNR Constructions.
What Are Current Liabilities, And How Do They Affect KNR Constructions’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 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.
KNR Constructions has total liabilities of ₹7.3b and total assets of ₹26b. As a result, its current liabilities are equal to approximately 28% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.
Our Take On KNR Constructions’s ROCE
With that in mind, we’re not overly impressed with KNR Constructions’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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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 editorial-team@simplywallst.com.
