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Today we'll evaluate Remsons Industries Limited (NSE:REMSONSIND) to determine whether it could have potential as an investment idea. 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. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
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. 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 Remsons Industries:
0.21 = ₹63m ÷ (₹802m - ₹497m) (Based on the trailing twelve months to March 2019.)
So, Remsons Industries has an ROCE of 21%.
View our latest analysis for Remsons Industries
Does Remsons Industries Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Remsons Industries's ROCE appears to be substantially greater than the 16% average in the Auto Components industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Independently of how Remsons Industries compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Our data shows that Remsons Industries currently has an ROCE of 21%, compared to its ROCE of 8.5% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Remsons Industries'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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. You can check if Remsons Industries has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.