In This Article:
Today we are going to look at KDDL Limited (NSE:KDDL) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. 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 KDDL:
0.16 = ₹494m ÷ (₹5.2b - ₹2.1b) (Based on the trailing twelve months to June 2019.)
So, KDDL has an ROCE of 16%.
See our latest analysis for KDDL
Is KDDL's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, we find that KDDL's ROCE is meaningfully better than the 12% average in the Luxury 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 KDDL compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
We can see that , KDDL currently has an ROCE of 16% compared to its ROCE 3 years ago, which was 11%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how KDDL's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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, after all, simply a snap shot of a single year. How cyclical is KDDL? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
KDDL's Current Liabilities And Their Impact On Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.