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Today we’ll evaluate Gulf Oil Lubricants India Limited (NSE:GULFOILLUB) to determine whether it could have potential as an investment idea. 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.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Overall, it 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.’
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 Gulf Oil Lubricants India:
0.47 = ₹2.3b ÷ (₹12b – ₹6.5b) (Based on the trailing twelve months to December 2018.)
So, Gulf Oil Lubricants India has an ROCE of 47%.
Is Gulf Oil Lubricants India’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Gulf Oil Lubricants India’s ROCE appears to be substantially greater than the 16% 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, Gulf Oil Lubricants India’s ROCE currently appears to be excellent.
Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Gulf Oil Lubricants India’s Current Liabilities Impact 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.
Gulf Oil Lubricants India has total assets of ₹12b and current liabilities of ₹6.5b. Therefore its current liabilities are equivalent to approximately 55% of its total assets. Gulf Oil Lubricants India boasts an attractive ROCE, even after considering the boost from high current liabilities.
What We Can Learn From Gulf Oil Lubricants India’s ROCE
In my book, this business could be worthy of further research. Of course you might be able to find a better stock than Gulf Oil Lubricants India. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are 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 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. On rare occasion, data errors may occur. Thank you for reading.