Today we are going to look at Dilip Buildcon Limited (NSE:DBL) to see whether it might be an attractive investment prospect. 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, 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.
Return On Capital Employed (ROCE): What is it?
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. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
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 Dilip Buildcon:
0.17 = ₹14b ÷ (₹144b - ₹59b) (Based on the trailing twelve months to June 2019.)
So, Dilip Buildcon has an ROCE of 17%.
Does Dilip Buildcon Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Dilip Buildcon's ROCE is meaningfully better than the 12% average in the Construction industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Dilip Buildcon compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Dilip Buildcon's current ROCE of 17% is lower than its ROCE in the past, which was 28%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Dilip Buildcon's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Dilip Buildcon's Current Liabilities Impact Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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.
Dilip Buildcon has total liabilities of ₹59b and total assets of ₹144b. Therefore its current liabilities are equivalent to approximately 41% of its total assets. With this level of current liabilities, Dilip Buildcon's ROCE is boosted somewhat.
The Bottom Line On Dilip Buildcon's ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. Dilip Buildcon 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.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.