Today we'll look at Tijaria Polypipes Limited (NSE:TIJARIA) and reflect on its potential as an investment. 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 measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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'.
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 Tijaria Polypipes:
0.21 = ₹124m ÷ (₹1.1b - ₹522m) (Based on the trailing twelve months to June 2019.)
So, Tijaria Polypipes has an ROCE of 21%.
See our latest analysis for Tijaria Polypipes
Is Tijaria Polypipes's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Tijaria Polypipes's ROCE appears to be substantially greater than the 14% average in the Building industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Tijaria Polypipes sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Tijaria Polypipes reported an ROCE of 21% -- better than 3 years ago, when the company didn't make a profit. This makes us wonder if the company is improving. You can see in the image below how Tijaria Polypipes's ROCE compares to its industry.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Tijaria Polypipes is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Tijaria Polypipes's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Tijaria Polypipes has total assets of ₹1.1b and current liabilities of ₹522m. As a result, its current liabilities are equal to approximately 47% of its total assets. Tijaria Polypipes has a middling amount of current liabilities, increasing its ROCE somewhat.
Our Take On Tijaria Polypipes's ROCE
While its ROCE looks good, it's worth remembering that the current liabilities are making the business look better. Tijaria Polypipes looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
Tijaria Polypipes is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.