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Today we’ll evaluate Whirlpool of India Limited (NSE:WHIRLPOOL) to determine whether it could have potential as an investment idea. 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 up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
Understanding 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. Ultimately, it is a useful but imperfect metric. 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 Whirlpool of India:
0.23 = ₹5.3b ÷ (₹37b – ₹14b) (Based on the trailing twelve months to March 2019.)
So, Whirlpool of India has an ROCE of 23%.
Does Whirlpool of India Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Whirlpool of India’s ROCE appears to be substantially greater than the 17% average in the Consumer Durables industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Whirlpool of India’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Whirlpool of India.
Whirlpool of India’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. 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.
Whirlpool of India has total assets of ₹37b and current liabilities of ₹14b. As a result, its current liabilities are equal to approximately 37% of its total assets. With this level of current liabilities, Whirlpool of India’s ROCE is boosted somewhat.
What We Can Learn From Whirlpool of India’s ROCE
Whirlpool of India’s ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than Whirlpool of India 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.
I will like Whirlpool of India better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, 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 firstname.lastname@example.org. 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.