Is Bhansali Engineering Polymers Limited’s (NSE:BEPL) 57% ROCE Any Good?

Today we are going to look at Bhansali Engineering Polymers Limited (NSE:BEPL) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. In the end, ROCE is a valuable metric that has its flaws. 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 Bhansali Engineering Polymers:

0.57 = ₹1.6b ÷ (₹4.2b - ₹1.5b) (Based on the trailing twelve months to March 2018.)

Therefore, Bhansali Engineering Polymers has an ROCE of 57%.

View our latest analysis for Bhansali Engineering Polymers

Does Bhansali Engineering Polymers Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Bhansali Engineering Polymers's ROCE is meaningfully better than the 17% average in the Chemicals 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, Bhansali Engineering Polymers's ROCE in absolute terms currently looks quite high.

As we can see, Bhansali Engineering Polymers currently has an ROCE of 57% compared to its ROCE 3 years ago, which was 11%. This makes us wonder if the company is improving.

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. How cyclical is Bhansali Engineering Polymers? You can see for yourself by looking at this freegraph of past earnings, revenue and cash flow.

Bhansali Engineering Polymers's Current Liabilities And Their Impact On Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.

Bhansali Engineering Polymers has total liabilities of ₹1.5b and total assets of ₹4.2b. As a result, its current liabilities are equal to approximately 36% of its total assets. A medium level of current liabilities boosts Bhansali Engineering Polymers's ROCE somewhat.

Our Take On Bhansali Engineering Polymers's ROCE

Still, it has a high ROCE, and may be an interesting prospect for further research. I am always impressed by a high ROCE, but you also must consider other factors. For example you might check if insiders are buying shares.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this freelist of interesting companies.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.