In This Article:
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Today we’ll look at Tanla Solutions Limited (NSE:TANLA) and reflect on its potential as an investment. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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’.
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 Tanla Solutions:
0.015 = ₹90m ÷ (₹9.7b – ₹2.7b) (Based on the trailing twelve months to December 2018.)
Therefore, Tanla Solutions has an ROCE of 1.5%.
See our latest analysis for Tanla Solutions
Does Tanla Solutions Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. In this analysis, Tanla Solutions’s ROCE appears meaningfully below the 10% average reported by the Software industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Tanla Solutions’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
As we can see, Tanla Solutions currently has an ROCE of 1.5%, less than the 3.7% it reported 3 years ago. So investors might consider if it has had issues recently.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. If Tanla Solutions is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.