Today we'll evaluate Gandhi Special Tubes Limited (NSE:GANDHITUBE) 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. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on 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. 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 Gandhi Special Tubes:

0.21 = ₹417m ÷ (₹2.1b - ₹126m) (Based on the trailing twelve months to December 2018.)

Therefore, Gandhi Special Tubes has an ROCE of 21%.

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Does Gandhi Special Tubes Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Gandhi Special Tubes's ROCE is meaningfully better than the 16% average in the Metals and Mining 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 Gandhi Special Tubes's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

As we can see, Gandhi Special Tubes currently has an ROCE of 21% compared to its ROCE 3 years ago, which was 11%. This makes us think about whether the company has been reinvesting shrewdly.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. Given the industry it operates in, Gandhi Special Tubes could be considered cyclical. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.