Today we are going to look at Dev Information Technology Limited (NSE:DEVIT) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
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.
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. 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?
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 Dev Information Technology:
0.22 = ₹77m ÷ (₹562m - ₹217m) (Based on the trailing twelve months to March 2019.)
Therefore, Dev Information Technology has an ROCE of 22%.
Check out our latest analysis for Dev Information Technology
Does Dev Information Technology Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Dev Information Technology's ROCE appears to be substantially greater than the 14% average in the IT industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Dev Information Technology's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
The image below shows how Dev Information Technology's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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, after all, simply a snap shot of a single year. You can check if Dev Information Technology has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Dev Information Technology's Current Liabilities Skew Its ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.