Knowing ROCE: The Key to a Profitably Expanding Company
" Discover How ROCE (return on capital employed ) can help you identify high quality businesses. Learn how to combine ROCE with growth for long term wealth creation and find top stocks using screener.in"
Among the most effective financial measures available for assessing a company is return on capital employed (ROCE). It indicates the company's capital use efficiency in producing earnings. When mixed with development, it creates a perfect recipe for long-term riches generation.
Let us dissect it using a basic case.
Return on Capital Employed, or ROCE, gauges a company's profit margin for every rupee of capital put in use.
Formula:
Where:
- EBIT = Profit before interest and taxes
- Capital Employed = Total assets – Current liabilities (or Equity + Debt)
ROCE shown as a percentage. A better ROCE indicates effective use of capital by the company.
Simple Corporate Example
Suppose you run a little medical shop. You put ₹10 lakh (capital employed), and at year's end your store makes ₹2 lakh in profit (EBIT).
Using the formula:
Your company so makes ₹20 for every ₹100 invested. Your store is more efficient if another medical store boasts a ROCE of 10%.
Why ROCE Alone Not Is Enough?
While a high ROCE is commendable, what would happen if your income is not rising? Every year a company has to raise earnings while keeping or raising its ROCE.
Suppose in Year 2 your medical store grows by including internet sales. Your profit goes to ₹3 lakh while your capital climbs to ₹12 lakh.
Revised ROCE:
Not only has your profit grown but also your efficiency has become better!
The power of ROCE plus growth equals wealth creation if a business:
- Regularly keeps a high ROCE (above 15 to 20%).
- Increases yearly earnings year after year.
It starts to be a compounding machine!
Companies Having High ROCE & Growth:
Examples
- ITC uses high ROCE in FMCG to enter hotels and IT.
- Asian Paints stretches their distribution network using its high ROCE.
ROCE: How can one apply it in investment?
Step 1:Search for companies having ROCE more than 15%.
Step 2:Make sure the business uses earnings to expand.
Step 3:Steer clear of companies whose ROCE is dropping over time.
While a company with low ROCE will squander capital, a company with high ROCE but no growth will remain stationary.
How to find good ROCE + Growth companies using screener?
To find good companies with high ROCE and high EPS growth, you can use Screener.in or similar stock screening platforms.
In screener.in run following query:
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