Today we are going to look at Thirumalai Chemicals Limited (NSE:TIRUMALCHM) to see whether it might be an attractive investment prospect. 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. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting 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. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

So, How Do We Calculate ROCE?

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 Thirumalai Chemicals:

0.18 = ₹1.5b ÷ (₹11b - ₹3.3b) (Based on the trailing twelve months to June 2019.)

Therefore, Thirumalai Chemicals has an ROCE of 18%.

View our latest analysis for Thirumalai Chemicals

Does Thirumalai Chemicals Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that Thirumalai Chemicals's ROCE is fairly close to the Chemicals industry average of 18%. Separate from Thirumalai Chemicals's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

Thirumalai Chemicals's current ROCE of 18% is lower than its ROCE in the past, which was 29%, 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Thirumalai Chemicals's ROCE compares to its industry, and you can click it to see more detail on its past growth.

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 only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Thirumalai Chemicals.

Thirumalai Chemicals'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.