Today we are going to look at ShreeOswal Seeds and Chemicals Limited (NSE:OSWALSEEDS) to see whether it might be an attractive investment prospect. 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.

First, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Finally, we’ll look at how its current liabilities affect 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’

So, How Do We Calculate ROCE?

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 ShreeOswal Seeds and Chemicals:

0.35 = ₹50m ÷ (₹518m – ₹377m) (Based on the trailing twelve months to March 2018.)

Therefore, ShreeOswal Seeds and Chemicals has an ROCE of 35%.

View our latest analysis for ShreeOswal Seeds and Chemicals

Does ShreeOswal Seeds and Chemicals Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In our analysis, ShreeOswal Seeds and Chemicals’s ROCE is meaningfully higher than the 13% average in the Food industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Putting aside its position relative to its industry for now, in absolute terms, ShreeOswal Seeds and Chemicals’s ROCE is currently very good.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. If ShreeOswal Seeds and Chemicals is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

How ShreeOswal Seeds and Chemicals’s Current Liabilities Impact Its ROCE

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

ShreeOswal Seeds and Chemicals has total liabilities of ₹377m and total assets of ₹518m. Therefore its current liabilities are equivalent to approximately 73% of its total assets. ShreeOswal Seeds and Chemicals boasts an attractive ROCE, even after considering the boost from high current liabilities.

Our Take On ShreeOswal Seeds and Chemicals’s ROCE

So to us, the company is potentially worth investigating further. Of course you might be able to find a better stock than ShreeOswal Seeds and Chemicals. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.