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Today we’ll look at Adhunik Industries Limited (NSE:ADHUNIKIND) and reflect on its potential as an investment. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed 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 Adhunik Industries:
0.17 = ₹214m ÷ (₹2.7b – ₹1.2b) (Based on the trailing twelve months to September 2018.)
So, Adhunik Industries has an ROCE of 17%.
View our latest analysis for Adhunik Industries
Does Adhunik Industries Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see Adhunik Industries’s ROCE is around the 16% average reported by the Metals and Mining industry. Separate from Adhunik Industries’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Adhunik Industries’s current ROCE of 17% is lower than its ROCE in the past, which was 29%, 3 years ago. So investors might consider if it has had issues recently.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Remember that most companies like Adhunik Industries are cyclical businesses. You can check if Adhunik Industries has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.