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Evaluating Shree Vasu Logistics Limited’s (NSE:SVLL) Investments In Its Business

Simply Wall St

Today we'll look at Shree Vasu Logistics Limited (NSE:SVLL) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First up, we'll look at what ROCE is and how we calculate it. 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.

Understanding Return On Capital Employed (ROCE)

ROCE measures the 'return' (pre-tax profit) a company generates from 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.'

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 Shree Vasu Logistics:

0.14 = ₹34m ÷ (₹385m - ₹140m) (Based on the trailing twelve months to March 2019.)

Therefore, Shree Vasu Logistics has an ROCE of 14%.

Check out our latest analysis for Shree Vasu Logistics

Does Shree Vasu Logistics Have A Good ROCE?

One way to assess ROCE is to compare similar companies. It appears that Shree Vasu Logistics's ROCE is fairly close to the Logistics industry average of 16%. Separate from how Shree Vasu Logistics stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.

You can see in the image below how Shree Vasu Logistics's ROCE compares to its industry. Click to see more on past growth.

NSEI:SVLL Past Revenue and Net Income, September 12th 2019

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 only a point-in-time measure. You can check if Shree Vasu Logistics has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How Shree Vasu Logistics'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. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Shree Vasu Logistics has total assets of ₹385m and current liabilities of ₹140m. Therefore its current liabilities are equivalent to approximately 36% of its total assets. Shree Vasu Logistics's ROCE is improved somewhat by its moderate amount of current liabilities.

The Bottom Line On Shree Vasu Logistics's ROCE

Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. Of course, you might also be able to find a better stock than Shree Vasu Logistics. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like Shree Vasu Logistics better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.