In This Article:
Today we'll evaluate Vascon Engineers Limited (NSE:VASCONEQ) to determine whether it could have potential as an investment idea. 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. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its 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 Vascon Engineers:
0.035 = ₹303m ÷ (₹13b - ₹4.7b) (Based on the trailing twelve months to June 2019.)
So, Vascon Engineers has an ROCE of 3.5%.
Check out our latest analysis for Vascon Engineers
Does Vascon Engineers Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Vascon Engineers's ROCE appears to be significantly below the 12% average in the Construction industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Vascon Engineers compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.6% available in government bonds. Readers may wish to look for more rewarding investments.
The image below shows how Vascon Engineers'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. You can check if Vascon Engineers has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Vascon Engineers's Current Liabilities Impact 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.