Today we'll look at Tara Chand Logistic Solutions Limited (NSE:TARACHAND) 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.
Firstly, 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.
Return On Capital Employed (ROCE): What is it?
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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'.
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 Tara Chand Logistic Solutions:
0.13 = ₹130m ÷ (₹1.4b - ₹362m) (Based on the trailing twelve months to June 2019.)
Therefore, Tara Chand Logistic Solutions has an ROCE of 13%.
See our latest analysis for Tara Chand Logistic Solutions
Is Tara Chand Logistic Solutions's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, Tara Chand Logistic Solutions's ROCE appears to be significantly below the 17% average in the Transportation industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Tara Chand Logistic Solutions stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
You can click on the image below to see (in greater detail) how Tara Chand Logistic Solutions's past growth compares to other companies.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Tara Chand Logistic Solutions has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.