In This Article:
Today we'll evaluate Vindhya Telelinks Limited (NSE:VINDHYATEL) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE 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. In general, businesses with a higher ROCE are usually better quality. 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 Vindhya Telelinks:
0.12 = ₹3.2b ÷ (₹43b - ₹15b) (Based on the trailing twelve months to March 2019.)
So, Vindhya Telelinks has an ROCE of 12%.
View our latest analysis for Vindhya Telelinks
Is Vindhya Telelinks's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Vindhya Telelinks's ROCE is around the 12% average reported by the Communications industry. Aside from the industry comparison, Vindhya Telelinks's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.
We can see that , Vindhya Telelinks currently has an ROCE of 12%, less than the 27% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Vindhya Telelinks's ROCE compares to its industry. Click to see more on past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. 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 Vindhya Telelinks.