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Today we’ll look at Gujarat Fluorochemicals Limited (NSE:GUJFLUORO) and reflect on its potential as an investment. 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. Second, we’ll look at its ROCE compared to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

Return On Capital Employed (ROCE): What is it?

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. 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 Gujarat Fluorochemicals:

0.11 = ₹4.5b ÷ (₹107b – ₹34b) (Based on the trailing twelve months to December 2018.)

Therefore, Gujarat Fluorochemicals has an ROCE of 11%.

View our latest analysis for Gujarat Fluorochemicals

Does Gujarat Fluorochemicals Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Gujarat Fluorochemicals’s ROCE is meaningfully below the Chemicals industry average of 17%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from how Gujarat Fluorochemicals stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Gujarat Fluorochemicals.

What Are Current Liabilities, And How Do They Affect Gujarat Fluorochemicals’s ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.

Gujarat Fluorochemicals has total liabilities of ₹34b and total assets of ₹107b. Therefore its current liabilities are equivalent to approximately 32% of its total assets. Gujarat Fluorochemicals has a medium level of current liabilities, which would boost its ROCE somewhat.

The Bottom Line On Gujarat Fluorochemicals’s ROCE

Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. Of course you might be able to find a better stock than Gujarat Fluorochemicals. So you may wish to see this free collection of other companies that have grown earnings strongly.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.