Why Vascon Engineers Limited’s (NSE:VASCONEQ) Use Of Investor Capital Doesn’t Look Great

Cameron Brookes

Fri, Feb 8, 2019, 6:30 PM

Today we are going to look at Vascon Engineers Limited (NSE:VASCONEQ) 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, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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?

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 Vascon Engineers:

0.022 = ₹177m ÷ (₹13b – ₹5.3b) (Based on the trailing twelve months to March 2018.)

Therefore, Vascon Engineers has an ROCE of 2.2%.

Check out our latest analysis for Vascon Engineers

Is Vascon Engineers’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Vascon Engineers’s ROCE is meaningfully below the Construction industry average of 12%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Vascon Engineers compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.6% available in government bonds. It is likely that there are more attractive prospects out there.

Vascon Engineers has an ROCE of 2.2%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. That implies the business has been 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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. You can check if Vascon Engineers has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.