How to Measure Profitability of a Company (ROCE)?

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In order to measure profitability of a company the best tool is Return on Capital Employed (ROCE).¬†Investors can also look into Profit & Loss accounts to check net profit (PAT) levels. But looking only into net profits says less about companies profitability. All investors have a common objective of buying stocks of good business. A good business is one that is profitable. In financial terms checking ROCE is a excellent of profitability of a company. Return on capital employed (ROCE) is expressed as percentage (%) of total ‘tangible capital invested’ in business. There are several advantages of being aware of ROCE of a company (more than just PAT). Investors can use profitability levels (ROCE, PAT) of one company and compare it with other. Lets take an example company A & B. The company with higher levels of profitability (ROCE) will be considered better for investment. Let us see an example:

PAT Profitability (ROCE)
Company A $ 500,000 6%
Company B $ 250,000 12%

An investor must prefer Company B over A as B’s ROCE is better. But if one does not know the ROCE concept, then by just looking at PAT, he/she will be tempted to invest in Company A. The investing logic is simple, a company which has prospects of faster growth shall be preferred for investing. Return on capital employed (ROCE) gives us this idea. It shows us how profitable a company is and how fast it can grow its profits in times to come. ROCE measure profitability of a company from point of view of owners. Suppose you want to generate annual income of say $10,000. In order to generate this income there are two possibilities. One possibility asks you to invest $100,000 and get return of $10,000/year. The other possibility asks only $90,000 and provides $10,000/year. Which option will you choose? Its obvious that the second option is more profitable. ROCE looks at profitability of business from this angle. $100,000 & $90,000 is called as capital employed and $10,000 is the return on capital employed. But if ROCE is so effective way to measure profitability of a company then why lot of investors does not use it?

Measure Profitability of a Company using ROCE

The hard part with ROCE is that; where PAT figures are directly available on profit & loss accounts, return on capital employed (ROCE) needs to be manually calculated. In this article we will see how to measure profitability of company using ROCE. To buy shares of good business, it is very important to know the ROCE figures.

Return on Capital Employed (ROCE) = PBIT / Capital Employed

PBIT (Profit Before Interest & Tax)

PBIT can be back calculated from Net Profit (PAT) by adding to it the interest and depreciation. All three figures PAT, interest & depreciation can be easily obtained form the profit & loss accounts of company. In order to compare the profitability of two companies, it is better to use PBIT instead of PAT because PBIT brings companies in same platform. Different companies work in different geographical locations. Working in different locations imposes different interest rates and local tax structures.

PBIT =  Net Profit (PAT) + Interest + Tax

Capital Employed

Employed capital gives an idea about how well company is using its funds to run its business. Company generates its funds from shareholders equity and debt it takes from banks etc. Idea of measuring profitability of company using ROCE is to know how much profit a company can generate from its capital employed.

Capital Employed = Shareholders Equity + Debt

This invested capital creates profits (PAT). The objective of any company is to generate maximum profits with minimum capital investment. Lets take an example:

PAT Capital Employed Profitability (ROCE)
Company C $ 500,000 $ 8,333,333 6%
Company D $ 500,000 $ 4,166,666 12%

An investor would like invest in company D over C because it generates the same level of profits (PAT) from less capital employed. This shows that the company D is more profitability than company C.

Example: Colgate Palmolive (India)

COLGATE PALMOLIVE (INDIA) Mar ’13 Mar ’12 Mar ’11 Mar ’10 Mar ’09 Average Last 10 Years
Net Sales 3,159.80 2,688.00 2,284.46 2,014.84 1,750.76
Total Expenses 2,484.80 2,158.03 1,794.33 1,542.25 1,416.91
Stock (Inventory) Adjustments -18.19 48.56 30.06 13.88 1.04
Operating Profit 656.81 578.53 520.19 486.47 334.89
Operating Margin 20.79% 21.52% 22.77% 24.14% 19.13% 19.78%
PAT 496.75 446.47 402.58 423.26 290.22
Net Profit Margin 15.72% 16.61% 17.62% 21.01% 16.58% 15.01%
Equity Dividend 380.78 339.98 299.18 271.99 203.99
Corporate Dividend Tax 61.77 55.15 49.69 45.84 34.14
Added to Reserve of last year 54.2 51.34 53.71 105.43 52.09
Total Share Capital 13.6 13.6 13.6 13.6 13.6
Reserves 475.99 421.79 370.45 312.51 202.7
Total Debt 0 0 0.05 4.59 4.69
Total Capital Emp. 489.59 435.39 384.1 330.7 220.99
ROCE 101.46% 102.54% 104.81% 127.99% 131.33% 90.16%
Profit for every INR of Capital Employed 1.01 1.03 1.05 1.28 1.31 0.9
Dividend Earned for every INR of Capital Employed 0.78 0.78 0.78 0.82 0.92 0.67
STORY From point of view of owners, Colgate is a very profitable company. For every dollar of employed capital, the owners earning $1 (ROCE). 

March’2014 Figures of Colgate Palmolive

Rs. Crore Multiple
TOTAL CAP EMPLOYED 489.59
NET SALES (stock adj) 3141.61 Sales Output 6.42
TOTAL EXPENSE 2484.80
OPERATING PROFIT 656.81 Operating Profit Output 1.34
PAT 496.75 ROCE 1.01
DIVIDEND PAYOUT 380.78 Dividend Output 0.78
CORPORATE DIV. TAX 61.77
ADDED TO RESERVE 54.20

How to Measure Profitability of a Company ROCE

List of Most Profitable Companies in India

(Updated as on April’2014)

SL Company Market Price (Rs.) Market cap (Rs Cr.) RoCE in % (latest FY)
1 Tata Consultancy Services Ltd 2,191.25 429,206.27 47.02
2 Hindustan Unilever Ltd 580.60 125,566.13 95.12
3 ITC Ltd 342.05 272,038.62 42.99
4 Bajaj Auto Ltd 1,985.40 57,450.92 41.63
5 Asian Paints Ltd 501.00 48,055.82 38.20
6 Colgate-Palmolive India Ltd 1,472.35 20,022.93 120.93
7 Nestle India Ltd 4,715.30 45,463.04 36.26
8 HCL Technologies Ltd 1,419.20 99,262.25 33.10
9 Hero MotoCorp Ltd 2,165.05 43,233.45 36.38
10 Infosys Ltd 3,178.15 182,500.81 26.87
11 CRISIL Ltd 1,270.20 8,974.34 46.59
12 Sun TV Network Ltd 393.10 15,491.48 34.66
13 Emami Ltd 471.40 10,699.27 34.46
14 Dabur India Ltd 180.15 31,414.79 27.39
15 Lupin Ltd 999.30 44,806.21 26.73
16 NMDC Ltd 149.70 59,351.80 25.60
17 Cummins India Ltd 554.30 15,365.20 31.13
18 Page Industries Ltd 5,797.25 6,466.25 41.64
19 Blue Dart Express Ltd 3,317.40 7,871.53 34.81
20 Jubilant Foodworks Ltd 967.50 6,331.22 42.64
21 Britannia Industries Ltd 888.50 10,655.43 30.88
22 Sun Pharmaceuticals Industries Ltd 635.20 131,560.34 23.32
23 Pidilite Industries Ltd 322.00 16,507.07 26.39
24 Cairn India Ltd 334.85 63,876.99 22.27
25 Hexaware Technologies Ltd 171.60 5,145.87 36.33
26 eClerx Services Ltd 1,208.30 3,631.18 51.42
27 Eicher Motors Ltd 6,114.70 16,543.32 25.55
28 Wipro Ltd 529.05 130,437.97 21.49
29 Alembic Pharmaceuticals Ltd 296.20 5,583.84 33.95
30 Divis Laboratories Ltd 1,397.15 18,544.93 25.11
31 Mindtree Ltd 1,432.20 5,961.68 31.86
32 Amara Raja Batteries Ltd 403.05 6,884.62 29.03
33 Triveni Turbine Ltd 75.35 2,486.14 109.72
34 VST Industries Ltd 1,885.10 2,910.97 50.67
35 Supreme Industries Ltd 460.05 5,843.88 28.75
36 Ajanta Pharma Ltd 993.30 3,491.55 33.96
37 CMC Ltd 1,487.95 4,508.49 29.54
38 Coal India Ltd 295.75 186,806.47 19.17
39 Engineers India Ltd 228.65 7,704.06 25.11
40 Procter & Gamble Hygiene and Health Care Ltd 3,407.55 11,061.25 23.00
41 Bajaj Corp Ltd 221.50 3,267.13 33.86
42 Indraprastha Gas Ltd 286.05 4,004.70 29.17
43 Symphony Ltd 836.05 2,924.42 33.28
44 Bharat Heavy Electricals Ltd 186.75 45,708.93 19.21
45 TTK Prestige Ltd 3,007.40 3,500.91 29.15
46 WABCO India Ltd 2,156.95 4,091.30 26.95
47 Petronet LNG Ltd 140.30 10,522.50 22.13
48 Dr Reddys Laboratories Ltd 2,672.35 45,459.08 19.28
49 D B Corp Ltd 282.60 5,185.31 26.07
50 Glaxosmithkline Pharma Ltd 2,422.85 20,522.27 20.30
51 Hindustan Zinc Ltd 130.10 54,971.40 17.66
52 Zee Entertainment Enterprises Ltd 269.30 25,864.89 19.51
53 Ipca Laboratories Ltd 820.45 10,354.00 21.44
54 Gujarat Mineral Development Corporation Ltd 135.85 4,320.03 25.47
55 Shree Cement Ltd 5,740.45 19,998.01 19.84
56 Accelya Kale Solutions Ltd 764.20 1,140.64 102.60
57 Hawkins Cooker Ltd 2,199.85 1,163.28 77.33
58 Oil India Ltd 494.00 29,696.12 17.92
59 Zydus Wellness Ltd 519.20 2,028.62 32.09
60 Sanofi India Ltd 3,074.65 7,081.23 21.58
61 Havells India Ltd 952.45 11,888.58 20.15
62 Credit Analysis & Research Ltd 810.55 2,350.51 30.65
63 Kajaria Ceramics Ltd 437.40 3,306.04 26.14
64 UltraTech Cement Ltd 2,050.80 56,241.34 16.30
65 Tech Mahindra Ltd 1,823.35 42,511.77 16.91
66 Just Dial Ltd 1,248.45 8,747.89 20.05
67 Oil & Natural Gas Corpn Ltd 321.30 274,887.89 15.29
68 Greaves Cotton Ltd 83.75 2,045.23 26.52
69 Rallis India Ltd 190.10 3,696.86 21.60
70 Multi Commodity Exchange of India Ltd 559.75 2,854.61 23.79
71 Zensar Technologies Ltd 371.45 1,625.73 26.63
72 Astral Poly Technik Ltd 557.70 3,133.72 22.38
73 NIIT Technologies Ltd 397.75 2,414.38 24.39
74 Cipla Ltd 406.65 32,650.78 15.66
75 Persistent Systems Ltd 1,039.55 4,158.20 20.81
76 Berger Paints India Ltd 242.70 8,409.09 17.56
77 Thermax Ltd 739.95 8,816.95 17.16
78 P I Industries Ltd 250.15 3,404.77 21.31
79 National Buildings Construction Corporation Ltd 204.15 2,449.80 22.33
80 Infotech Enterprises Ltd 324.40 3,632.14 20.35
81 Oracle Financial Services Software Ltd 3,052.45 25,684.54 15.40
82 Kewal Kiran Clothing Ltd 1,260.00 1,552.95 24.93
83 ALSTOM India Ltd 417.70 2,808.07 21.96
84 Apollo Tyres Ltd 163.90 8,260.97 16.58
85 Vakrangee Ltd 98.00 4,934.12 18.36
86 Swaraj Engines Ltd 692.50 860.09 31.63
87 Orient Cement Ltd 49.55 1,015.13 27.24
88 C Mahendra Exports Ltd 186.00 1,116.00 26.48
89 KPIT Technologies Ltd 171.55 3,329.31 20.31
90 Torrent Pharmaceuticals Ltd 564.50 9,552.64 15.89
91 Grasim Industries Ltd 2,645.40 24,291.91 15.21
92 La Opala RG Ltd 820.95 870.04 29.64
93 Gujarat State Petronet Ltd 73.05 4,110.81 18.99
94 Dhanuka Agritech Ltd 266.15 1,331.28 24.90
95 Glenmark Pharmaceuticals Ltd 580.60 15,747.27 15.37
96 Hatsun Agro Product Ltd 270.90 2,917.38 20.13
97 Kansai Nerolac Paints Ltd 1,181.65 6,368.15 16.24
98 Bata India Ltd 1,098.05 7,056.51 15.84
99 Sunrise Asian Ltd 446.90 2,040.68 21.08
100 FDC Ltd 133.50 2,374.07 20.33
101 Cera Sanitaryware Ltd 872.85 1,104.59 24.82
102 Marksans Pharma Ltd 22.85 880.43 26.43
103 NESCO Ltd 887.70 1,250.95 23.35
104 Ratnamani Metals & Tubes Ltd 238.10 1,111.52 23.47
105 Coromandel International Ltd 219.60 6,218.68 15.84
106 Vinati Organics Ltd 274.85 1,357.02 22.04
107 Bayer CropScience Ltd 1,441.75 5,279.54 16.03
108 Poly Medicure Ltd 466.95 1,028.83 23.37
109 Navneet Education Ltd 61.55 1,466.21 21.39
110 Grindwell Norton Ltd 315.90 1,748.82 20.54
111 AIA Engineering Ltd 613.85 5,789.83 15.61
112 Goodyear India Ltd 421.15 971.47 24.22
113 Muthoot Finance Ltd 174.45 6,484.53 15.27
114 Agro Tech Foods Ltd 497.80 1,213.09 21.47
115 Kirloskar Oil Engines Ltd 194.90 2,818.53 17.35
116 Unichem Laboratories Ltd 217.25 1,968.87 19.18
117 Monsanto India Ltd 1,792.40 3,094.22 16.90
118 Selan Explorations Technology Ltd 515.45 845.34 24.25
119 Suprajit Engineering Ltd 73.75 885.15 22.30
120 HMT Ltd 30.95 2,353.28 17.16
121 Vesuvius India Ltd 525.25 1,066.05 20.60
122 MOIL Ltd 259.60 4,361.28 15.02
123 Va Tech Wabag Ltd 795.40 2,115.13 16.89
124 V I P Industries Ltd 96.95 1,370.07 17.65
125 CEAT Ltd 403.65 1,451.36 17.45
126 SE Investments Ltd 368.20 1,493.42 17.22
127 Solar Industries India Ltd 1,044.15 1,889.70 16.46
128 Tata Coffee Ltd 1,040.10 1,942.59 16.44
129 Timken India Ltd 205.20 1,395.36 16.42
130 Hindustan Media Ventures Ltd 133.15 977.24 17.73
131 Wyeth Ltd 864.85 1,964.94 15.48
132 Balmer Lawrie & Company Ltd 356.00 1,014.64 17.27
133 ICRA Ltd 1,876.30 1,876.30 15.55
134 Eros International Media Ltd 164.40 1,512.04 15.59
135 Kolte Patil Developers Ltd 100.50 761.54 18.10
136 Gujarat Alkalies & Chemicals Ltd 178.55 1,311.22 15.54
137 Esab India Ltd 494.80 761.65 16.95
138 Greenply Industries Ltd 409.00 987.16 16.20
139 Transport Corporation of India Ltd 126.60 923.52 16.27
140 Gujarat Industries Power Co Ltd 70.30 1,063.29 15.37
141 ISGEC Heavy Engineering Ltd 1,157.30 850.96 15.86
142 Signet Industries Ltd 305.75 892.39 15.46


Article Checked by Getmoneyrich

Comments:5

  1. Sir.
    I am new to investing and have gone through the article which was very educative. To learn more on this I tried to calculate ROC and Earnings Yield of a sample company TCS. Although calculation of Earnings yield was simple, ROC was bit confusing. I was looking both Bal sheet and profit and Loss statement of TCS provided by moneycontrol site. The following are my doubts.
    1. Is PBIT and PBDIT the same.
    2. The is no figure for PAT, but Net profit is there. Is this the PAT.
    3. when calculating Fixed asset with the formula Gross Block – Current Asset, i found it was coming negative, since current asset was more than gross block.
    4. Where to get the working capital and fixed assets figures from.

    I would be grateful if you could mail me a sample calculation of any company with its connected financial statements, I could corelate the same and learn more.

    Thanks and Regards.
    Ms Rehna Ghosh

  2. i am a follower of ur blog.Ur recent post (Posted: 30 Nov 2012 09:08 AM PST) grow my interest.Basically i am a mechanical engineer,invested in some of cases & every times book losses.so,i am searching the ways of making profits.Ur thinking & motivating writing astonished me very much.
    keep writing which inspires so many readers like me.
    I am trying to capture yr article,but fail to understand.so,if you kindly describe the magic formula for first 1 to 10 rank company in nse or bse by calculating. I would be grateful if you could mail me a sample calculation of any such companies.

    Thanking u.

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