How Good Is Maharashtra Seamless Limited (NSE:MAHSEAMLES) At Creating Shareholder Value?

Today we'll look at Maharashtra Seamless Limited (NSE:MAHSEAMLES) and reflect on its potential as an investment. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

Firstly, we'll go over how we calculate ROCE. 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. 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.

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 Maharashtra Seamless:

0.15 = ₹6.4b ÷ (₹46b - ₹4.3b) (Based on the trailing twelve months to September 2019.)

So, Maharashtra Seamless has an ROCE of 15%.

See our latest analysis for Maharashtra Seamless

Is Maharashtra Seamless's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Maharashtra Seamless's ROCE is around the 14% average reported by the Metals and Mining industry. Regardless of where Maharashtra Seamless sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

Our data shows that Maharashtra Seamless currently has an ROCE of 15%, compared to its ROCE of 1.9% 3 years ago. This makes us think the business might be improving. You can see in the image below how Maharashtra Seamless's ROCE compares to its industry.

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Given the industry it operates in, Maharashtra Seamless could be considered cyclical. Since the future is so important for investors, you should check out our free report on analyst forecasts for Maharashtra Seamless.

Maharashtra Seamless'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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Maharashtra Seamless has total assets of ₹46b and current liabilities of ₹4.3b. As a result, its current liabilities are equal to approximately 9.4% of its total assets. Low current liabilities have only a minimal impact on Maharashtra Seamless's ROCE, making its decent returns more credible.

The Bottom Line On Maharashtra Seamless's ROCE

This is good to see, and while better prospects may exist, Maharashtra Seamless seems worth researching further. There might be better investments than Maharashtra Seamless 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.

Maharashtra Seamless is not the only stock insiders are buying. So take a peek at this free list of growing companies with 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.