Here’s What Akzo Nobel India Limited’s (NSE:AKZOINDIA) Return On Capital Can Tell Us

Austin Wood

Wed, Feb 6, 2019, 5:13 PM

Today we’ll evaluate Akzo Nobel India Limited (NSE:AKZOINDIA) to determine whether it could have potential as an investment idea. 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. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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?

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 Akzo Nobel India:

0.18 = ₹2.4b ÷ (₹22b – ₹8.7b) (Based on the trailing twelve months to March 2018.)

So, Akzo Nobel India has an ROCE of 18%.

See our latest analysis for Akzo Nobel India

Does Akzo Nobel India Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Akzo Nobel India’s ROCE appears to be around the 16% average of the Chemicals industry. Independently of how Akzo Nobel India compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

NSEI:AKZOINDIA Last Perf February 7th 19

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Akzo Nobel India.

Do Akzo Nobel India’s Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.