Has Mangalore Chemicals & Fertilizers Limited (NSE:MANGCHEFER) Been Employing Capital Shrewdly?
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Today we'll evaluate Mangalore Chemicals & Fertilizers Limited (NSE:MANGCHEFER) to determine whether it could have potential as an investment idea. 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.
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 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. Ultimately, it is a useful but imperfect metric. 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 Mangalore Chemicals & Fertilizers:
0.19 = ₹1.5b ÷ (₹29b - ₹21b) (Based on the trailing twelve months to March 2019.)
Therefore, Mangalore Chemicals & Fertilizers has an ROCE of 19%.
Check out our latest analysis for Mangalore Chemicals & Fertilizers
Is Mangalore Chemicals & Fertilizers's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Mangalore Chemicals & Fertilizers's ROCE appears to be around the 17% average of the Chemicals industry. Independently of how Mangalore Chemicals & Fertilizers compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
The image below shows how Mangalore Chemicals & Fertilizers's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is 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. If Mangalore Chemicals & Fertilizers is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Mangalore Chemicals & Fertilizers's Current Liabilities Impact Its 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Mangalore Chemicals & Fertilizers has total assets of ₹29b and current liabilities of ₹21b. Therefore its current liabilities are equivalent to approximately 72% of its total assets. This is admittedly a high level of current liabilities, improving ROCE substantially.
Our Take On Mangalore Chemicals & Fertilizers's ROCE
This ROCE is pretty good, but remember that it would look less impressive with fewer current liabilities. Mangalore Chemicals & Fertilizers 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 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.
