Here's What Gillette India Limited's (NSE:GILLETTE) ROCE Can Tell Us

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Today we are going to look at Gillette India Limited (NSE:GILLETTE) 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, we'll go over how we 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.

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

ROCE measures the 'return' (pre-tax profit) a company generates from 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

So, How Do We Calculate ROCE?

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 Gillette India:

0.52 = ₹4.0b ÷ (₹14b - ₹6.0b) (Based on the trailing twelve months to March 2019.)

So, Gillette India has an ROCE of 52%.

See our latest analysis for Gillette India

Is Gillette India's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Gillette India's ROCE is meaningfully higher than the 24% average in the Personal Products industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Gillette India's ROCE is currently very good.

In our analysis, Gillette India's ROCE appears to be 52%, compared to 3 years ago, when its ROCE was 36%. This makes us think the business might be improving.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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. How cyclical is Gillette India? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Gillette India's ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

Gillette India has total liabilities of ₹6.0b and total assets of ₹14b. Therefore its current liabilities are equivalent to approximately 44% of its total assets. Gillette India's ROCE is boosted somewhat by its middling amount of current liabilities.

Our Take On Gillette India's ROCE

Despite this, it reports a high ROCE, and may be worth investigating further. Gillette 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.

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 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.