Should You Like Bhansali Engineering Polymers Limited’s (NSE:BEPL) High Return On Capital Employed?

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Today we'll evaluate Bhansali Engineering Polymers Limited (NSE:BEPL) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into 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.

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. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

So, How Do We Calculate ROCE?

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:

0.22 = ₹717m ÷ (₹5.3b - ₹2.0b) (Based on the trailing twelve months to March 2019.)

So, Bhansali Engineering Polymers has an ROCE of 22%.

Check out our latest analysis for Bhansali Engineering Polymers

Is Bhansali Engineering Polymers's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Bhansali Engineering Polymers's ROCE is meaningfully higher than the 17% average in the Chemicals industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Bhansali Engineering Polymers sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Bhansali Engineering Polymers's current ROCE of 22% is lower than 3 years ago, when the company reported a 30% ROCE. So investors might consider if it has had issues recently.

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Bhansali Engineering Polymers is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

How Bhansali Engineering Polymers's Current Liabilities Impact 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. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counter this, investors can check if a company has high current liabilities relative to total assets.

Bhansali Engineering Polymers has total liabilities of ₹2.0b and total assets of ₹5.3b. Therefore its current liabilities are equivalent to approximately 39% of its total assets. With this level of current liabilities, Bhansali Engineering Polymers's ROCE is boosted somewhat.

The Bottom Line On Bhansali Engineering Polymers's ROCE

With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. There might be better investments than Bhansali Engineering Polymers 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.

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

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.