In This Article:
Today we'll evaluate Triveni Turbine Limited (NSE:TRITURBINE) to determine whether it could have potential as an investment idea. 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. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is 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 Triveni Turbine:
0.29 = ₹1.5b ÷ (₹7.9b - ₹2.6b) (Based on the trailing twelve months to September 2019.)
So, Triveni Turbine has an ROCE of 29%.
See our latest analysis for Triveni Turbine
Is Triveni Turbine's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Triveni Turbine's ROCE is meaningfully higher than the 12% average in the Electrical 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, Triveni Turbine's ROCE in absolute terms currently looks quite high.
We can see that, Triveni Turbine currently has an ROCE of 29%, less than the 48% it reported 3 years ago. So investors might consider if it has had issues recently. The image below shows how Triveni Turbine's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. 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 Triveni Turbine.
Do Triveni Turbine's Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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.