In This Article:
Today we’ll evaluate Himadri Speciality Chemical Limited (NSE:HSCL) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we’ll work out how to 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.
Return On Capital Employed (ROCE): What is it?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’
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 Himadri Speciality Chemical:
0.22 = ₹4.2b ÷ (₹26b – ₹6.6b) (Based on the trailing twelve months to March 2018.)
Therefore, Himadri Speciality Chemical has an ROCE of 22%.
Check out our latest analysis for Himadri Speciality Chemical
Is Himadri Speciality Chemical’s ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Himadri Speciality Chemical’s ROCE is meaningfully better than the 17% average in the Chemicals 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. Independently of how Himadri Speciality Chemical compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
As we can see, Himadri Speciality Chemical currently has an ROCE of 22% compared to its ROCE 3 years ago, which was 5.0%. This makes us think the business might be improving.
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. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.