Today we are going to look at Ahlada Engineers Limited (NSE:AHLADA) 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.
Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect 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. All else being equal, a better business will have a higher ROCE. 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?
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 Ahlada Engineers:
0.27 = ₹170m ÷ (₹1.5b – ₹835m) (Based on the trailing twelve months to March 2018.)
Therefore, Ahlada Engineers has an ROCE of 27%.
Is Ahlada Engineers’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Ahlada Engineers’s ROCE is meaningfully better than the 12% average in the Building industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Ahlada Engineers’s ROCE in absolute terms currently looks quite high.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. You can check if Ahlada Engineers has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Ahlada Engineers’s Current Liabilities And Their Impact On 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. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.
Ahlada Engineers has total liabilities of ₹835m and total assets of ₹1.5b. Therefore its current liabilities are equivalent to approximately 57% of its total assets. Ahlada Engineers’s high level of current liabilities boost the ROCE – but its ROCE is still impressive.
The Bottom Line On Ahlada Engineers’s ROCE
In my book, this business could be worthy of further research. There might be better investments than Ahlada Engineers out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.