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Today we are going to look at Tube Investments of India Limited (NSE:TIINDIA) 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, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the 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’.
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 Tube Investments of India:
0.18 = ₹2.6b ÷ (₹36b – ₹18b) (Based on the trailing twelve months to September 2018.)
So, Tube Investments of India has an ROCE of 18%.
View our latest analysis for Tube Investments of India
Is Tube Investments of India’s ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Tube Investments of India’s ROCE is around the 17% average reported by the Auto Components industry. Regardless of where Tube Investments of India sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Tube Investments of India reported an ROCE of 18% — better than 3 years ago, when the company didn’t make a profit. That suggests the business has returned to profitability.
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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Tube Investments of India.
Do Tube Investments of India’s Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.