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.

Tara Chand Logistic Solutions's Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Tara Chand Logistic Solutions has total assets of ₹1.4b and current liabilities of ₹362m. Therefore its current liabilities are equivalent to approximately 27% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

Our Take On Tara Chand Logistic Solutions's ROCE

That said, Tara Chand Logistic Solutions's ROCE is mediocre, there may be more attractive investments around. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.