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Today we'll evaluate APL Apollo Tubes Limited (NSE:APLAPOLLO) 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.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. 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. Generally speaking a higher ROCE is better. 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.'
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 APL Apollo Tubes:
0.26 = ₹3.4b ÷ (₹28b - ₹15b) (Based on the trailing twelve months to March 2019.)
Therefore, APL Apollo Tubes has an ROCE of 26%.
Check out our latest analysis for APL Apollo Tubes
Does APL Apollo Tubes Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, APL Apollo Tubes's ROCE is meaningfully higher than the 14% average in the Metals and Mining industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, APL Apollo Tubes's ROCE in absolute terms currently looks quite high.
You can click on the image below to see (in greater detail) how APL Apollo Tubes's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. We note APL Apollo Tubes could be considered a cyclical business. Since the future is so important for investors, you should check out our free report on analyst forecasts for APL Apollo Tubes.