In This Article:
Today we'll evaluate Cords Cable Industries Limited (NSE:CORDSCABLE) to determine whether it could have potential as an investment idea. 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.
Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
What is 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. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 Cords Cable Industries:
0.21 = ₹342m ÷ (₹3.1b - ₹1.5b) (Based on the trailing twelve months to June 2019.)
Therefore, Cords Cable Industries has an ROCE of 21%.
View our latest analysis for Cords Cable Industries
Does Cords Cable Industries Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Cords Cable Industries's ROCE appears to be substantially greater than the 13% 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. Separate from Cords Cable Industries's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
You can click on the image below to see (in greater detail) how Cords Cable Industries's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. If Cords Cable Industries is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Cords Cable Industries's Current Liabilities Impact 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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.