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Today we'll evaluate Crompton Greaves Consumer Electricals Limited (NSE:CROMPTON) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

Understanding 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.'

So, How Do We Calculate ROCE?

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 Crompton Greaves Consumer Electricals:

0.39 = ₹5.7b ÷ (₹27b - ₹12b) (Based on the trailing twelve months to March 2019.)

So, Crompton Greaves Consumer Electricals has an ROCE of 39%.

See our latest analysis for Crompton Greaves Consumer Electricals

Does Crompton Greaves Consumer Electricals Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Crompton Greaves Consumer Electricals'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. Setting aside the comparison to its industry for a moment, Crompton Greaves Consumer Electricals's ROCE in absolute terms currently looks quite high.

We can see that , Crompton Greaves Consumer Electricals currently has an ROCE of 39% compared to its ROCE 3 years ago, which was 27%. This makes us wonder if the company is improving. The image below shows how Crompton Greaves Consumer Electricals's ROCE compares to its industry, and you can click it to see more detail on its past growth.

It is important to remember that ROCE shows past performance, and is 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. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Crompton Greaves Consumer Electricals.

What Are Current Liabilities, And How Do They Affect Crompton Greaves Consumer Electricals's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Crompton Greaves Consumer Electricals has total liabilities of ₹12b and total assets of ₹27b. As a result, its current liabilities are equal to approximately 45% of its total assets. A medium level of current liabilities boosts Crompton Greaves Consumer Electricals's ROCE somewhat.

The Bottom Line On Crompton Greaves Consumer Electricals's ROCE

Even so, it has a great ROCE, and could be an attractive prospect for further research. Crompton Greaves Consumer Electricals shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.