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Today we’ll evaluate ITD Cementation India Limited (NSE:ITDCEM) to determine whether it could have potential as an investment idea. 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. Second, we’ll look at its ROCE compared to similar companies. 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. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 ITD Cementation India:
0.25 = ₹2.5b ÷ (₹26b – ₹16b) (Based on the trailing twelve months to December 2018.)
So, ITD Cementation India has an ROCE of 25%.
View our latest analysis for ITD Cementation India
Does ITD Cementation India Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. ITD Cementation India’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 ITD Cementation India compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
It is important to remember that ROCE shows past performance, and is 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, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for ITD Cementation India.
What Are Current Liabilities, And How Do They Affect ITD Cementation India’s 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.