In This Article:
Today we are going to look at Indo Count Industries Limited (NSE:ICIL) 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 up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding 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?
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 Indo Count Industries:
0.14 = ₹1.6b ÷ (₹16b - ₹4.6b) (Based on the trailing twelve months to June 2019.)
Therefore, Indo Count Industries has an ROCE of 14%.
View our latest analysis for Indo Count Industries
Is Indo Count Industries's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Indo Count Industries's ROCE is around the 12% average reported by the Luxury industry. Separate from how Indo Count Industries stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.
Indo Count Industries's current ROCE of 14% is lower than 3 years ago, when the company reported a 47% ROCE. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Indo Count Industries's past growth compares to other companies.
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. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Indo Count Industries.