Today we are going to look at Nila Infrastructures Limited (NSE:NILA) 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. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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'.

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 Nila Infrastructures:

0.20 = ₹340m ÷ (₹2.8b - ₹1.0b) (Based on the trailing twelve months to March 2019.)

Therefore, Nila Infrastructures has an ROCE of 20%.

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Check out our latest analysis for Nila Infrastructures

Is Nila Infrastructures's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Nila Infrastructures's ROCE is meaningfully better than the 12% average in the Construction industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Nila Infrastructures's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

As we can see, Nila Infrastructures currently has an ROCE of 20% compared to its ROCE 3 years ago, which was 9.5%. This makes us think about whether the company has been reinvesting shrewdly.

It is important to remember that ROCE shows past performance, and is 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. You can check if Nila Infrastructures has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.