What Does Rudrabhishek Enterprises Limited’s (NSE:REPL) 14% ROCE Say About The Business?

Today we are going to look at Rudrabhishek Enterprises Limited (NSE:REPL) 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. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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 Rudrabhishek Enterprises:

0.14 = ₹99m ÷ (₹805m - ₹100m) (Based on the trailing twelve months to March 2019.)

So, Rudrabhishek Enterprises has an ROCE of 14%.

View our latest analysis for Rudrabhishek Enterprises

Is Rudrabhishek Enterprises's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Rudrabhishek Enterprises's ROCE appears to be around the 12% average of the Professional Services industry. Setting aside the industry comparison for now, Rudrabhishek Enterprises'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.

You can click on the image below to see (in greater detail) how Rudrabhishek Enterprises's past growth compares to other companies.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 Rudrabhishek Enterprises has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How Rudrabhishek Enterprises's Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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.

Rudrabhishek Enterprises has total assets of ₹805m and current liabilities of ₹100m. As a result, its current liabilities are equal to approximately 12% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

Our Take On Rudrabhishek Enterprises's ROCE

That said, Rudrabhishek Enterprises's ROCE is mediocre, there may be more attractive investments around. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.