In This Article:
Today we are going to look at HeidelbergCement India Limited (NSE:HEIDELBERG) 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 up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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'.
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 HeidelbergCement India:
0.23 = ₹4.2b ÷ (₹27b - ₹9.1b) (Based on the trailing twelve months to June 2019.)
So, HeidelbergCement India has an ROCE of 23%.
Check out our latest analysis for HeidelbergCement India
Is HeidelbergCement India's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that HeidelbergCement India's ROCE is meaningfully better than the 9.8% average in the Basic Materials industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how HeidelbergCement India compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
In our analysis, HeidelbergCement India's ROCE appears to be 23%, compared to 3 years ago, when its ROCE was 11%. This makes us think the business might be improving. You can see in the image below how HeidelbergCement India's ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for HeidelbergCement India.