Is There More To Vishnu Chemicals Limited (NSE:VISHNU) Than Its 21% Returns On Capital?

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Today we are going to look at Vishnu Chemicals Limited (NSE:VISHNU) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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 Vishnu Chemicals:

0.21 = ₹827m ÷ (₹7.6b - ₹3.7b) (Based on the trailing twelve months to March 2019.)

So, Vishnu Chemicals has an ROCE of 21%.

See our latest analysis for Vishnu Chemicals

Does Vishnu Chemicals Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. It appears that Vishnu Chemicals's ROCE is fairly close to the Chemicals industry average of 18%. Separate from Vishnu Chemicals's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

You can see in the image below how Vishnu Chemicals's ROCE compares to its industry. Click to see more on past growth.

It is important to remember that ROCE shows past performance, and is 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. If Vishnu Chemicals is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Vishnu Chemicals'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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Vishnu Chemicals has total liabilities of ₹3.7b and total assets of ₹7.6b. Therefore its current liabilities are equivalent to approximately 48% of its total assets. Vishnu Chemicals has a middling amount of current liabilities, increasing its ROCE somewhat.

The Bottom Line On Vishnu Chemicals's ROCE

Vishnu Chemicals's ROCE does look good, but the level of current liabilities also contribute to that. Vishnu Chemicals 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.

I will like Vishnu Chemicals better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.