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Today we’ll evaluate The Tinplate Company Of India Limited (NSE:TINPLATE) to determine whether it could have potential as an investment idea. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we’ll look at what ROCE is and how we calculate it. 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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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?
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 Tinplate Company Of India:
0.12 = ₹1.1b ÷ (₹11b – ₹3.2b) (Based on the trailing twelve months to December 2018.)
Therefore, Tinplate Company Of India has an ROCE of 12%.
See our latest analysis for Tinplate Company Of India
Does Tinplate Company Of India Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Tinplate Company Of India’s ROCE appears to be significantly below the 16% average in the Metals and Mining industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Aside from the industry comparison, Tinplate Company Of India’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
As we can see, Tinplate Company Of India currently has an ROCE of 12%, less than the 17% it reported 3 years ago. This makes us wonder if the business is facing new challenges.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. We note Tinplate Company Of India could be considered a cyclical business. Since the future is so important for investors, you should check out our free report on analyst forecasts for Tinplate Company Of India.