What Can We Make Of Alkyl Amines Chemicals Limited’s (NSE:ALKYLAMINE) High Return On Capital?

Simply Wall St

Sun, Jul 14, 2019, 6:52 PM

Today we are going to look at Alkyl Amines Chemicals Limited (NSE:ALKYLAMINE) to see whether it might be an attractive investment prospect. 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

Understanding Return On Capital Employed (ROCE)

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. 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?

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 Alkyl Amines Chemicals:

0.27 = ₹1.4b ÷ (₹7.6b - ₹2.5b) (Based on the trailing twelve months to March 2019.)

Therefore, Alkyl Amines Chemicals has an ROCE of 27%.

Check out our latest analysis for Alkyl Amines Chemicals

Does Alkyl Amines Chemicals Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Alkyl Amines Chemicals's ROCE appears to be substantially greater than the 18% average in the Chemicals industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Alkyl Amines Chemicals's ROCE currently appears to be excellent.

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

NSEI:ALKYLAMINE Past Revenue and Net Income, July 15th 2019

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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Alkyl Amines Chemicals.

Alkyl Amines Chemicals's Current Liabilities And Their Impact On Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.