Coromandel International Limited (NSE:COROMANDEL) Earns Among The Best Returns In Its Industry

Today we’ll look at Coromandel International Limited (NSE:COROMANDEL) and reflect on its potential as an investment. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First up, we’ll look at what ROCE is and how we calculate it. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.

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

ROCE measures the amount of pre-tax profits a company can generate from the capital employed 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. 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?

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 Coromandel International:

0.39 = ₹13b ÷ (₹100b – ₹66b) (Based on the trailing twelve months to December 2018.)

Therefore, Coromandel International has an ROCE of 39%.

See our latest analysis for Coromandel International

Does Coromandel International Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Coromandel International’s ROCE appears to be substantially greater than the 17% average in the Chemicals industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, Coromandel International’s ROCE currently appears to be excellent.

Our data shows that Coromandel International currently has an ROCE of 39%, compared to its ROCE of 30% 3 years ago. This makes us think the business might be improving.

NSEI:COROMANDEL Past Revenue and Net Income, March 9th 2019
NSEI:COROMANDEL Past Revenue and Net Income, March 9th 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Coromandel International.

Do Coromandel International’s Current Liabilities Skew 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Coromandel International has total assets of ₹100b and current liabilities of ₹66b. Therefore its current liabilities are equivalent to approximately 66% of its total assets. Coromandel International boasts an attractive ROCE, even after considering the boost from high current liabilities.

What We Can Learn From Coromandel International’s ROCE

So we would be interested in doing more research here — there may be an opportunity! But note: Coromandel International may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

I will like Coromandel International 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 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.