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Evaluating Balkrishna Industries Limited’s (NSE:BALKRISIND) Investments In Its Business

Simply Wall St

Today we'll evaluate Balkrishna Industries Limited (NSE:BALKRISIND) 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. 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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

So, How Do We Calculate ROCE?

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 Balkrishna Industries:

0.18 = ₹8.9b ÷ (₹65b - ₹15b) (Based on the trailing twelve months to June 2019.)

Therefore, Balkrishna Industries has an ROCE of 18%.

Check out our latest analysis for Balkrishna Industries

Is Balkrishna Industries's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. We can see Balkrishna Industries's ROCE is around the 15% average reported by the Auto Components industry. Regardless of where Balkrishna Industries sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

You can click on the image below to see (in greater detail) how Balkrishna Industries's past growth compares to other companies.

NSEI:BALKRISIND Past Revenue and Net Income, October 2nd 2019
NSEI:BALKRISIND Past Revenue and Net Income, October 2nd 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during 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.

What Are Current Liabilities, And How Do They Affect Balkrishna Industries'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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Balkrishna Industries has total liabilities of ₹15b and total assets of ₹65b. As a result, its current liabilities are equal to approximately 22% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.

Our Take On Balkrishna Industries's ROCE

With that in mind, Balkrishna Industries's ROCE appears pretty good. There might be better investments than Balkrishna Industries out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

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 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.