Today we are going to look at CCL Products (India) Limited (NSE:CCL) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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'.
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 CCL Products (India):
0.21 = ₹2.2b ÷ (₹14b - ₹3.5b) (Based on the trailing twelve months to June 2019.)
Therefore, CCL Products (India) has an ROCE of 21%.
Does CCL Products (India) Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. CCL Products (India)'s ROCE appears to be substantially greater than the 12% average in the Food industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from CCL Products (India)'s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
CCL Products (India)'s current ROCE of 21% is lower than its ROCE in the past, which was 34%, 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how CCL Products (India)'s ROCE compares to its industry. Click to see more on past growth.
When considering this metric, keep in mind that it is backwards looking, and 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. 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 CCL Products (India)'s 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 counter this, investors can check if a company has high current liabilities relative to total assets.
CCL Products (India) has total assets of ₹14b and current liabilities of ₹3.5b. As a result, its current liabilities are equal to approximately 24% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
The Bottom Line On CCL Products (India)'s ROCE
This is good to see, and with a sound ROCE, CCL Products (India) could be worth a closer look. CCL Products (India) looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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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.