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Today we are going to look at D. P. Abhushan Limited (NSE:DPABHUSHAN) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we’ll work out how to calculate ROCE. Then we’ll compare its ROCE to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for D. P. Abhushan:
0.26 = ₹260m ÷ (₹2.3b – ₹1.3b) (Based on the trailing twelve months to March 2019.)
So, D. P. Abhushan has an ROCE of 26%.
Does D. P. Abhushan Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that D. P. Abhushan’s ROCE is meaningfully better than the 13% average in the Specialty Retail 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, D. P. Abhushan’s ROCE currently appears to be excellent.
Our data shows that D. P. Abhushan currently has an ROCE of 26%, compared to its ROCE of 14% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.
It is important to remember that ROCE shows past performance, and is 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. ROCE is, after all, simply a snap shot of a single year. If D. P. Abhushan is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
D. P. Abhushan’s Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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.
D. P. Abhushan has total liabilities of ₹1.3b and total assets of ₹2.3b. Therefore its current liabilities are equivalent to approximately 56% of its total assets. D. P. Abhushan’s high level of current liabilities boost the ROCE – but its ROCE is still impressive.
The Bottom Line On D. P. Abhushan’s ROCE
In my book, this business could be worthy of further research. There might be better investments than D. P. Abhushan 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.
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. Thank you for reading.