In This Article:
Today we are going to look at Himatsingka Seide Limited (NSE:HIMATSEIDE) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding 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. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 Himatsingka Seide:
0.13 = ₹4.6b ÷ (₹52b - ₹18b) (Based on the trailing twelve months to June 2019.)
Therefore, Himatsingka Seide has an ROCE of 13%.
View our latest analysis for Himatsingka Seide
Is Himatsingka Seide's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Himatsingka Seide's ROCE appears to be around the 12% average of the Luxury industry. Separate from how Himatsingka Seide stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
We can see that, Himatsingka Seide currently has an ROCE of 13%, less than the 18% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Himatsingka Seide'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. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Himatsingka Seide.
Do Himatsingka Seide's Current Liabilities Skew 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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.