Why We Like Delta Corp Limited’s (NSE:DELTACORP) 14% Return On Capital Employed

Simply Wall St

Sat, Mar 30, 2019, 8:29 PM

Today we are going to look at Delta Corp Limited (NSE:DELTACORP) to see whether it might be an attractive investment prospect. 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. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting 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. Overall, it is a valuable metric that has its flaws. 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 Delta:

0.14 = ₹2.6b ÷ (₹20b - ₹1.2b) (Based on the trailing twelve months to December 2018.)

Therefore, Delta has an ROCE of 14%.

View our latest analysis for Delta

Does Delta Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Delta's ROCE is meaningfully better than the 7.0% average in the Hospitality industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Aside from the industry comparison, Delta's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

Our data shows that Delta currently has an ROCE of 14%, compared to its ROCE of 7.8% 3 years ago. This makes us wonder if the company is improving.

NSEI:DELTACORP Past Revenue and Net Income, March 31st 2019

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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.