Today we'll evaluate Dhunseri Ventures Limited (NSE:DVL) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Dhunseri Ventures:
0.029 = ₹452m ÷ (₹16b - ₹263m) (Based on the trailing twelve months to June 2019.)
So, Dhunseri Ventures has an ROCE of 2.9%.
Does Dhunseri Ventures Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Dhunseri Ventures's ROCE appears meaningfully below the 17% average reported by the Chemicals industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Independently of how Dhunseri Ventures compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.6% available in government bonds. Readers may wish to look for more rewarding investments.
We can see that, Dhunseri Ventures currently has an ROCE of 2.9% compared to its ROCE 3 years ago, which was 1.5%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Dhunseri Ventures's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. You can check if Dhunseri Ventures has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Dhunseri Ventures'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. 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.
Dhunseri Ventures has total liabilities of ₹263m and total assets of ₹16b. Therefore its current liabilities are equivalent to approximately 1.6% of its total assets. Dhunseri Ventures has very few current liabilities, which have a minimal effect on its already low ROCE.
What We Can Learn From Dhunseri Ventures's ROCE
Nevertheless, there are potentially more attractive companies to invest in. You might be able to find a better investment than Dhunseri Ventures. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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 email@example.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.