In This Article:
Today we are going to look at Fineotex Chemical Limited (NSE:FCL) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed 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'.
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 Fineotex Chemical:
0.19 = ₹320m ÷ (₹1.9b - ₹295m) (Based on the trailing twelve months to June 2019.)
So, Fineotex Chemical has an ROCE of 19%.
See our latest analysis for Fineotex Chemical
Does Fineotex Chemical Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Using our data, Fineotex Chemical's ROCE appears to be around the 17% average of the Chemicals industry. Regardless of where Fineotex Chemical sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that, Fineotex Chemical currently has an ROCE of 19%, less than the 28% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how Fineotex Chemical's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately 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 only a point-in-time measure. You can check if Fineotex Chemical has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Fineotex Chemical'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. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.