Here’s why Camlin Fine Sciences Limited’s (NSE:CAMLINFINE) Returns On Capital Matters So Much

Today we’ll look at Camlin Fine Sciences Limited (NSE:CAMLINFINE) and reflect on its potential as an investment. 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. Next, we’ll compare it to others in its industry. 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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’.

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 Camlin Fine Sciences:

0.12 = ₹760m ÷ (₹11b – ₹4.7b) (Based on the trailing twelve months to September 2019.)

Therefore, Camlin Fine Sciences has an ROCE of 12%.

Check out our latest analysis for Camlin Fine Sciences

Is Camlin Fine Sciences’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Camlin Fine Sciences’s ROCE appears to be significantly below the 17% average in the Chemicals industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Aside from the industry comparison, Camlin Fine Sciences’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

We can see that, Camlin Fine Sciences currently has an ROCE of 12%, less than the 19% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Camlin Fine Sciences’s past growth compares to other companies.

NSEI:CAMLINFINE Past Revenue and Net Income, January 18th 2020
NSEI:CAMLINFINE Past Revenue and Net Income, January 18th 2020

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Camlin Fine Sciences’s Current Liabilities And Their Impact On 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.

Camlin Fine Sciences has total liabilities of ₹4.7b and total assets of ₹11b. As a result, its current liabilities are equal to approximately 42% of its total assets. Camlin Fine Sciences has a medium level of current liabilities, which would boost its ROCE somewhat.

The Bottom Line On Camlin Fine Sciences’s ROCE

Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. You might be able to find a better investment than Camlin Fine Sciences. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like Camlin Fine Sciences better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.

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. Thank you for reading.