Today we'll look at Trigyn Technologies Limited (NSE:TRIGYN) and reflect on its potential as an investment. 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. 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. All else being equal, a better business will have a higher ROCE. 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.'

How Do You Calculate Return On Capital Employed?

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 Trigyn Technologies:

0.19 = ₹834m ÷ (₹5.4b - ₹966m) (Based on the trailing twelve months to March 2019.)

So, Trigyn Technologies has an ROCE of 19%.

View our latest analysis for Trigyn Technologies

Is Trigyn Technologies's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Trigyn Technologies's ROCE is meaningfully higher than the 14% average in the IT industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Trigyn Technologies's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

The image below shows how Trigyn Technologies's ROCE compares to its industry, and you can click it to see more detail on its past growth.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. How cyclical is Trigyn Technologies? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

How Trigyn Technologies's Current Liabilities Impact 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. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.