In This Article:
Today we'll evaluate Hindalco Industries Limited (NSE:HINDALCO) to determine whether it could have potential as an investment idea. 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. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting 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 Hindalco Industries:
0.085 = ₹101b ÷ (₹1.5t - ₹337b) (Based on the trailing twelve months to June 2019.)
So, Hindalco Industries has an ROCE of 8.5%.
See our latest analysis for Hindalco Industries
Is Hindalco Industries's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Hindalco Industries's ROCE is meaningfully below the Metals and Mining industry average of 14%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Hindalco Industries stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
In our analysis, Hindalco Industries's ROCE appears to be 8.5%, compared to 3 years ago, when its ROCE was 4.9%. This makes us think the business might be improving. The image below shows how Hindalco Industries's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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. We note Hindalco Industries could be considered a cyclical business. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.