Today we'll look at Linc Pen & Plastics Limited (NSE:LINCPENQ) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
What is 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. 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?
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 Linc Pen & Plastics:
0.12 = ₹165m ÷ (₹2.5b - ₹1.1b) (Based on the trailing twelve months to December 2018.)
So, Linc Pen & Plastics has an ROCE of 12%.
View our latest analysis for Linc Pen & Plastics
Does Linc Pen & Plastics Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Linc Pen & Plastics's ROCE appears to be around the 12% average of the Commercial Services industry. Setting aside the industry comparison for now, Linc Pen & Plastics's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
Linc Pen & Plastics's current ROCE of 12% is lower than its ROCE in the past, which was 21%, 3 years ago. Therefore we wonder if the company is facing new headwinds.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Linc Pen & Plastics? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Linc Pen & Plastics's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.