In This Article:
Today we'll look at Talbros Automotive Components Limited (NSE:TALBROAUTO) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to calculate ROCE. 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 measures the 'return' (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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 Talbros Automotive Components:
0.13 = ₹296m ÷ (₹5.0b - ₹2.7b) (Based on the trailing twelve months to June 2019.)
Therefore, Talbros Automotive Components has an ROCE of 13%.
See our latest analysis for Talbros Automotive Components
Does Talbros Automotive Components Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. It appears that Talbros Automotive Components's ROCE is fairly close to the Auto Components industry average of 15%. Separate from how Talbros Automotive Components stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
Talbros Automotive Components's current ROCE of 13% is lower than its ROCE in the past, which was 19%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Talbros Automotive Components's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Talbros Automotive Components.