In This Article:
Today we are going to look at Gujarat Alkalies and Chemicals Limited (NSE:GUJALKALI) to see whether it might be an attractive investment prospect. 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.
First up, we’ll look at what ROCE is and how we calculate it. 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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. 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?
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 Gujarat Alkalies and Chemicals:
0.15 = ₹6.6b ÷ (₹50b – ₹4.8b) (Based on the trailing twelve months to March 2018.)
So, Gujarat Alkalies and Chemicals has an ROCE of 15%.
View our latest analysis for Gujarat Alkalies and Chemicals
Is Gujarat Alkalies and Chemicals’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Gujarat Alkalies and Chemicals’s ROCE appears to be around the 17% average of the Chemicals industry. Aside from the industry comparison, Gujarat Alkalies and Chemicals’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
Our data shows that Gujarat Alkalies and Chemicals currently has an ROCE of 15%, compared to its ROCE of 6.8% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.
It is important to remember that ROCE shows past performance, and is 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Gujarat Alkalies and Chemicals.