In This Article:
Today we are going to look at Hindalco Industries Limited (NSE:HINDALCO) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. Then we’ll determine how its current liabilities are affecting 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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 Hindalco Industries:
0.082 = ₹95b ÷ (₹1.5t – ₹323b) (Based on the trailing twelve months to March 2018.)
Therefore, Hindalco Industries has an ROCE of 8.2%.
See our latest analysis for Hindalco Industries
Does Hindalco Industries Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Hindalco Industries’s ROCE appears to be significantly below the 16% average in the Metals and Mining industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Hindalco Industries compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.6% available in government bonds. Readers may wish to look for more rewarding investments.
Our data shows that Hindalco Industries currently has an ROCE of 8.2%, compared to its ROCE of 5.0% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. Given the industry it operates in, Hindalco Industries could be considered cyclical. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Hindalco Industries.