In This Article:
Today we'll look at GPT Infraprojects Limited (NSE:GPTINFRA) 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 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.
Understanding Return On Capital Employed (ROCE)
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. 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 GPT Infraprojects:
0.18 = ₹460m ÷ (₹7.0b - ₹4.5b) (Based on the trailing twelve months to June 2019.)
Therefore, GPT Infraprojects has an ROCE of 18%.
View our latest analysis for GPT Infraprojects
Is GPT Infraprojects's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. GPT Infraprojects's ROCE appears to be substantially greater than the 13% average in the Construction 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. Independently of how GPT Infraprojects compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
GPT Infraprojects's current ROCE of 18% is lower than its ROCE in the past, which was 26%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how GPT Infraprojects's ROCE compares to its industry. Click to see more on past growth.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If GPT Infraprojects is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.