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Today we'll look at SORIL Infra Resources Limited (NSE:SORILINFRA) and reflect on its potential as an investment. 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 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.
Return On Capital Employed (ROCE): What is it?
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'.
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 SORIL Infra Resources:
0.0063 = ₹17m ÷ (₹6.6b - ₹3.8b) (Based on the trailing twelve months to March 2019.)
Therefore, SORIL Infra Resources has an ROCE of 0.6%.
View our latest analysis for SORIL Infra Resources
Is SORIL Infra Resources's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, SORIL Infra Resources's ROCE appears to be significantly below the 13% average in the Commercial Services industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Putting aside SORIL Infra Resources's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
SORIL Infra Resources's current ROCE of 0.6% is lower than its ROCE in the past, which was 25%, 3 years ago. Therefore we wonder if the company is facing new headwinds.
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 only a point-in-time measure. How cyclical is SORIL Infra Resources? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.