Today we'll look at JTEKT India Limited (NSE:JTEKTINDIA) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.

What is 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. 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 JTEKT India:

0.16 = ₹1.1b ÷ (₹11b - ₹4.0b) (Based on the trailing twelve months to June 2019.)

So, JTEKT India has an ROCE of 16%.

View our latest analysis for JTEKT India

Does JTEKT India Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. It appears that JTEKT India's ROCE is fairly close to the Auto Components industry average of 15%. Regardless of where JTEKT India sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

The image below shows how JTEKT India's ROCE compares to its industry, and you can click it to see more detail on its past growth.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is JTEKT India? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

JTEKT India's Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

JTEKT India has total liabilities of ₹4.0b and total assets of ₹11b. As a result, its current liabilities are equal to approximately 37% of its total assets. JTEKT India has a medium level of current liabilities, which would boost the ROCE.

What We Can Learn From JTEKT India's ROCE

While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. There might be better investments than JTEKT India out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.