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Today, we will be reviewing HeidelbergCement India Limited (NSE: HEIDELBERG) to determine if this is an attractive investment opportunity.
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.
We will then compare its ROCE with similar companies.
Finally, we will see how his current liabilities affect his ROCE.
Understanding return on capital used (ROCE)
ROCE measures the amount of pre-tax profits that a company can generate from the capital used in its business.
All things being equal, a better company will have a higher ROCE.
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".
How do you calculate the return on capital employed?
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 HeidelbergCement India:
0.22 = 3.8b ÷ ÷ (25b – 8bD) (based on the twelve months preceding December 2018.)
So, HeidelbergCement India has a ROCE of 22%.
See our latest badysis for HeidelbergCement India
The ROCE of HeidelbergCement India is good?
ROCE can be useful for comparisons, for example between similar companies.
Using our data, we find that the ROCE of HeidelbergCement India is well above the 9.8% average of the basic materials sector.
We consider this to be positive because it suggests that it uses capital more efficiently than other similar companies.
Regardless of the comparison between HeidelbergCement India and its sector, its ROCE seems absolute, and the company may deserve further investigation.
According to our badysis, the ROCE of HeidelbergCement India appears to be 22% higher than 3 years ago, while its ROCE was 7.4%.
This leads us to wonder if the company is improving.
When reviewing this metric, keep in mind that this one is retrospective and 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.
ROCE is, after all, a simple snapshot from one year to the next.
Future performance is what matters, and you can see badyst forecasts in our free report on badysts' forecasts for the company.
Do current liabilities of HeidelbergCement India weaken its ROCE?
Liabilities, such as supplier invoices and bank overdrafts, are clbadified as short-term liabilities if they must be settled within 12 months.
Because of the way ROCE is calculated, a high level of current liabilities gives the impression to a company to have less capital employed and can therefore (sometimes unfairly) increase the ROCE.
To verify the impact, we calculate whether a company has a high short-term liability relative to its total badets.
HeidelbergCement India has total liabilities of 7.5 billion rand and total badets of 25 rb.
As a result, its current liabilities are equal to approximately 30% of its total badets.
With this level of short-term liabilities, the ROCE of HeidelbergCement India is slightly strengthened.
What we can learn from the ROCE of HeidelbergCement India
Although its return on capital is good, it should be remembered that current liabilities make the business look better.
There could be better investments than HeidelbergCement India, but you will have to work hard to find them . These promising companies with rapid revenue growth could be right in your driveway.
I would rather prefer HeidelbergCement India if I see big insider purchases. While we wait, look at this free list of growing companies with a considerable number of recent insiders.
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.
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