Today we’ll evaluate Bhansali Engineering Polymers Limited (NSE:BEPL) 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.
Firstly, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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 Bhansali Engineering Polymers:
0.57 = ₹1.6b ÷ (₹4.2b – ₹1.5b) (Based on the trailing twelve months to March 2018.)
So, Bhansali Engineering Polymers has an ROCE of 57%.
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 16% average in the Chemicals industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Bhansali Engineering Polymers’s ROCE is currently very good.
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 think the business might be improving.
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. You can check if Bhansali Engineering Polymers has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Bhansali Engineering Polymers’s Current Liabilities Skew 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Bhansali Engineering Polymers has total liabilities of ₹1.5b and total assets of ₹4.2b. Therefore its current liabilities are equivalent to approximately 36% of its total assets. Bhansali Engineering Polymers’s ROCE is boosted somewhat by its middling amount of current liabilities.
What We Can Learn From Bhansali Engineering Polymers’s ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.
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.