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Today we are going to look at Dixon Technologies (India) Limited (NSE:DIXON) to see whether it might be an attractive investment prospect. 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. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

How Do You Calculate Return On Capital Employed?

Analysts use this formula to calculate return on capital employed:

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

Or for Dixon Technologies (India):

0.20 = ₹1.1b ÷ (₹15b - ₹9.3b) (Based on the trailing twelve months to March 2019.)

So, Dixon Technologies (India) has an ROCE of 20%.

View our latest analysis for Dixon Technologies (India)

Is Dixon Technologies (India)'s ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. In our analysis, Dixon Technologies (India)'s ROCE is meaningfully higher than the 15% average in the Consumer Durables industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Dixon Technologies (India) compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

Dixon Technologies (India)'s current ROCE of 20% is lower than its ROCE in the past, which was 29%, 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Dixon Technologies (India)'s ROCE compares to its industry, and you can click it to see more detail on its past growth.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Dixon Technologies (India).