In This Article:
Today we'll look at Selan Exploration Technology Limited (NSE:SELAN) and reflect on its potential as an investment. 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.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. Overall, it is a valuable metric that has its flaws. 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?
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 Selan Exploration Technology:
0.10 = ₹383m ÷ (₹3.9b - ₹66m) (Based on the trailing twelve months to June 2019.)
Therefore, Selan Exploration Technology has an ROCE of 10%.
View our latest analysis for Selan Exploration Technology
Does Selan Exploration Technology Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, Selan Exploration Technology's ROCE appears to be around the 10% average of the Oil and Gas industry. Regardless of how Selan Exploration Technology stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
In our analysis, Selan Exploration Technology's ROCE appears to be 10%, compared to 3 years ago, when its ROCE was 2.1%. This makes us wonder if the company is improving. The image below shows how Selan Exploration Technology'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. 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. We note Selan Exploration Technology could be considered a cyclical business. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Selan Exploration Technology.