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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. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the 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 Gulf Oil Lubricants India:
0.43 = ₹2.6b ÷ (₹11b – ₹5.3b) (Based on the trailing twelve months to March 2019.)
Therefore, Gulf Oil Lubricants India has an ROCE of 43%.
Is Gulf Oil Lubricants India’s ROCE Good?
One way to assess ROCE is to compare similar companies. Gulf Oil Lubricants India’s ROCE appears to be substantially greater than the 17% average in the Chemicals industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Gulf Oil Lubricants India’s ROCE currently appears to be excellent.
Gulf Oil Lubricants India’s current ROCE of 43% is lower than 3 years ago, when the company reported a 60% ROCE. Therefore we wonder if the company is facing new headwinds.
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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Gulf Oil Lubricants India’s ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Gulf Oil Lubricants India has total liabilities of ₹5.3b and total assets of ₹11b. As a result, its current liabilities are equal to approximately 47% of its total assets. Gulf Oil Lubricants India has a medium level of current liabilities, boosting its ROCE somewhat.
The Bottom Line On Gulf Oil Lubricants India’s ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. There might be better investments than Gulf Oil Lubricants India 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.
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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. Thank you for reading.