Why We Like Endurance Technologies Limited’s (NSE:ENDURANCE) 25% Return On Capital Employed

Simply Wall St

Tue, May 28, 2019, 7:54 PM

Today we'll look at Endurance Technologies Limited (NSE:ENDURANCE) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

Firstly, 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 amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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 Endurance Technologies:

0.25 = ₹7.5b ÷ (₹48b - ₹18b) (Based on the trailing twelve months to March 2019.)

So, Endurance Technologies has an ROCE of 25%.

See our latest analysis for Endurance Technologies

Does Endurance Technologies Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Endurance Technologies's ROCE is meaningfully better than the 17% average in the Auto Components industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Endurance Technologies's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

NSEI:ENDURANCE Past Revenue and Net Income, May 29th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How Endurance Technologies's Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counter this, investors can check if a company has high current liabilities relative to total assets.