Today we'll evaluate Balmer Lawrie & Co. Ltd. (NSE:BALMLAWRIE) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Balmer Lawrie:

0.10 = ₹1.8b ÷ (₹23b - ₹5.2b) (Based on the trailing twelve months to June 2019.)

Therefore, Balmer Lawrie has an ROCE of 10%.

View our latest analysis for Balmer Lawrie

Is Balmer Lawrie's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, Balmer Lawrie's ROCE appears to be significantly below the 16% average in the Industrials industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Balmer Lawrie's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.

Balmer Lawrie's current ROCE of 10% is lower than its ROCE in the past, which was 14%, 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Balmer Lawrie's ROCE compares to its industry, and you can click it to see more detail on its past growth.

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. You can check if Balmer Lawrie has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.