Should You Care About DRS Dilip Roadlines Limited’s (NSE:DRSDILIP) Investment Potential?

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Today we'll evaluate DRS Dilip Roadlines Limited (NSE:DRSDILIP) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

What is 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. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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?

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 DRS Dilip Roadlines:

0.17 = ₹77m ÷ (₹830m - ₹368m) (Based on the trailing twelve months to March 2018.)

So, DRS Dilip Roadlines has an ROCE of 17%.

See our latest analysis for DRS Dilip Roadlines

Does DRS Dilip Roadlines Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. It appears that DRS Dilip Roadlines's ROCE is fairly close to the Transportation industry average of 17%. Regardless of where DRS Dilip Roadlines sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

NSEI:DRSDILIP Past Revenue and Net Income, June 19th 2019
NSEI:DRSDILIP Past Revenue and Net Income, June 19th 2019

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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If DRS Dilip Roadlines is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Do DRS Dilip Roadlines's Current Liabilities Skew 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. 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.

DRS Dilip Roadlines has total assets of ₹830m and current liabilities of ₹368m. As a result, its current liabilities are equal to approximately 44% of its total assets. DRS Dilip Roadlines has a middling amount of current liabilities, increasing its ROCE somewhat.

What We Can Learn From DRS Dilip Roadlines's ROCE

With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. DRS Dilip Roadlines shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.