Friday, September 5, 2008


According to Warren Buffet, the best measure to gauge a company is to look at its ROCE - Return On Capital Employed. Unfortunately, ROCE's definition is Profit Before Interest & Tax / (Capital Employed=Total Assets - Current Liabilities). Thus it includes tax + interest. For a company having an ROCE of 20% with 30% of PBIT Tax rate and 3% of CE as Interest burden, PAT/Capital Employed will go down to 12%. He also mentions that you need to deduct interest and tax from ROCE to calculate how much return you get on your capital employed. This doesn't remain constant for a company throughout its life. Bharat forge had an ROCE in excess of 30% till 2005 but it fell to 16-18% after that. So constantly keep watching the ROCE of a company you have invested in. If it falls below 20%, it is a warning sign.
Bookmark and Share

No comments:

Related Posts with Thumbnails