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Today we are going to look at Triveni Turbine Limited (NSE:TRITURBINE) to see whether it might be an attractive investment prospect. 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, 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. 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 Triveni Turbine:
0.31 = ₹1.5b ÷ (₹8.1b - ₹3.3b) (Based on the trailing twelve months to December 2018.)
Therefore, Triveni Turbine has an ROCE of 31%.
View our latest analysis for Triveni Turbine
Does Triveni Turbine Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Triveni Turbine's ROCE appears to be substantially greater than the 15% average in the Electrical industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Setting aside the comparison to its industry for a moment, Triveni Turbine's ROCE in absolute terms currently looks quite high.
As we can see, Triveni Turbine currently has an ROCE of 31%, less than the 47% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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 only a point-in-time measure. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Triveni Turbine.
What Are Current Liabilities, And How Do They Affect Triveni Turbine's ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.