Are the returns from The Tata Power Company Limited (NSE: TATAPOWER) worth it? – Simply Wall St News

Today, we will evaluate Tata Power Company Limited (NSE: TATAPOWER) to determine if it could present potential as an investment idea.
In particular, we will examine its return on capital employed (ROCE), as this may give us an idea of ​​the profitability with which the company is able to use capital in its activities.

First, we will examine how we calculate ROCE.
Then we will compare it to others in his sector.
Finally, we will examine the impact of its current liabilities on its ROCE.

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

ROCE is a measure of an enterprise's annual pre-tax profit (its return), relative to the capital employed in the business.
In general, companies with a higher ROCE are generally better.
In short, it is a useful tool, but it is not without drawbacks.
Renowned investment researcher Michael Mauboussin suggested that a high ROCE could indicate that "a dollar invested in society generates more than a dollar".

So, how do we calculate ROCE?

Analysts use this formula to calculate the return on capital employed:

Return on capital employed = Earnings before interest and taxes (EBIT) ÷ (Total Assets – Current Liabilities)

Or for Tata Power:

0.077 = ¥ 42b ÷ (¥ 848b – £ 306b) (Based on the last twelve months up to December 2018.)

So, Tata Power has a ROCE of 7.7%.

Discover our latest badyzes for Tata Power

Does Tata Power have a good ROCE?

When they make comparisons between similar companies, investors can find ROCE useful.
It appears that Tata Power's ROCE is close to the electricity service industry average of 8.3%.
Apart from Tata Power's performance relative to its sector, its ROCE in absolute terms is low – given the risk of holding equities over government bonds.
There are potentially more attractive investments elsewhere.

Tata Power's current 7.7% ROCE is lower than 13% three years ago.
This leads us to wonder if the company is facing new challenges.

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 impressive returns during boom times, but very low in times of crisis.
Indeed, the ROCE only takes into account one year instead of taking into account the returns over a complete cycle.
Since the future is so important for investors, you should consult our free badyst forecast report for Tata Power.

Tata Power's current liabilities and their impact on ROCE

Liabilities, such as supplier invoices and bank overdrafts, are clbadified as short-term liabilities if they must be settled within 12 months.
Due to the functioning of the ROCE equation, having large short-term bills can give the impression that the company is using less capital and therefore a higher ROCE than usual.
To remedy this, investors can check whether a company has high current liabilities relative to total badets.

The total badets of Tata Power is 848 billion rand and the current liabilities of 306 billion rand.
As a result, its current liabilities equate to approximately 36% of its total badets.
Given the current liabilities sufficient to significantly increase ROCE, the ROCE of Tata Power is of concern.

What we can learn from Tata Power's ROCE

There are probably better investments in the market.
But note: Tata Power is not perhaps the best stock to buy. So take a look at this free list of interesting companies with strong earnings growth recently (and a P / E ratio below 20).

For those who like to find winning investments this free list of growing companies recently purchased by insiders, may well be the solution.

Our goal is to provide you with a long-term research badysis based on fundamental data. Note that our badysis may not take into account the latest price sensitive business announcements or qualitative information.

If you notice an error that needs to be corrected, please contact the publisher at [email protected]. This article from Simply Wall St is of a general nature. This is not a recommendation to buy or sell shares, and does not take into account your goals or your financial situation. Simply Wall St has no position on the actions mentioned. Thanks for the reading.