Today we are going to look at Commercial Engineers & Body Builders Co Limited (NSE:CEBBCO) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Understanding 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.

How Do You Calculate Return On Capital Employed?

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 Commercial Engineers & Body Builders Co:

0.015 = ₹23m ÷ (₹2.1b - ₹498m) (Based on the trailing twelve months to June 2019.)

So, Commercial Engineers & Body Builders Co has an ROCE of 1.5%.

See our latest analysis for Commercial Engineers & Body Builders Co

Is Commercial Engineers & Body Builders Co's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, Commercial Engineers & Body Builders Co's ROCE appears to be significantly below the 13% average in the Machinery industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Commercial Engineers & Body Builders Co compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.6% available in government bonds. There are potentially more appealing investments elsewhere.

Commercial Engineers & Body Builders Co reported an ROCE of 1.5% -- better than 3 years ago, when the company didn't make a profit. That suggests the business has returned to profitability. You can click on the image below to see (in greater detail) how Commercial Engineers & Body Builders Co's past growth compares to other companies.

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. How cyclical is Commercial Engineers & Body Builders Co? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Commercial Engineers & Body Builders Co's 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Commercial Engineers & Body Builders Co has total assets of ₹2.1b and current liabilities of ₹498m. As a result, its current liabilities are equal to approximately 24% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.

Our Take On Commercial Engineers & Body Builders Co's ROCE

That's not a bad thing, however Commercial Engineers & Body Builders Co has a weak ROCE and may not be an attractive investment. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.