How to calculate the return of a company?
Updated: May 11
There are many ways to assess the return profile of a company starting from readily available data to a more complex calculation.
Return on Capital Employed (ROCE)
It is a firm-level return measure that is calculated by dividing earnings before interest and taxes by the difference between total assets and current liabilities.
You can directly source this from Screener.in for any company.
As you can see Reliance Industries has a much lower ROCE than Nestle India and Page Industries. This is no basis for you to allocate in Nestle India or Page, the share price may be too high.
Return on Invested Capital (ROIC)
It is a firm-level return measure that is calculated by dividing Net Operating Profit After Taxes by Invested Capital. This requires a bit of hard work. It requires the investor to read the annual report word by word and understand the segregation between operating i.e. core business and non-operating items.
Here is a calculation of Pidilite ROIC.
So at one level, you see the break-up of items that makes margin and on the other capital efficiency i.e. how the asset of the business are being used.
Return on Equity (RoE)
This is an equity-level return metric. Du Pont Analysis is a financial framework developed by Du Pont Corporation to break down RoE into insightful components.
Return on Equity = Margin x Asset Turnover x Leverage
Return on Equity = (PAT / Sales) x (Sales / Assets) x (Assets / Net worth)
Du Pont Analysis for Havells India
This analysis can be done by sourcing data from screener.in. The breakup is not directly available but it does not take a long time to source data and perform the calculation.
As an investor starts his/her analysis, ROCE can be analyzed. This way it will help whether it's even worth spending time on the analysis. Reviewing the annual report and performing an ROIC analysis is the best way to understand the return of a company. RoE is useful for financial companies.
Michael J. Mauboussin's article on ROIC <<Click here>>
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