Today we'll evaluate D. P. Abhushan Limited (NSE:DPABHUSHAN) 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 up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 D. P. Abhushan:
0.26 = ₹261m ÷ (₹2.3b - ₹1.3b) (Based on the trailing twelve months to March 2019.)
Therefore, D. P. Abhushan has an ROCE of 26%.
See our latest analysis for D. P. Abhushan
Does D. P. Abhushan Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, we find that D. P. Abhushan's ROCE is meaningfully better than the 14% average in the Specialty Retail 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. Regardless of the industry comparison, in absolute terms, D. P. Abhushan's ROCE currently appears to be excellent.
In our analysis, D. P. Abhushan's ROCE appears to be 26%, compared to 3 years ago, when its ROCE was 14%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how D. P. Abhushan's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. How cyclical is D. P. Abhushan? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.