Hind Rectifiers Limited (NSE:HIRECT) Is Employing Capital Very Effectively
Today we are going to look at Hind Rectifiers Limited (NSE:HIRECT) 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
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. Overall, it is a valuable metric that has its flaws. 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'.
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 Hind Rectifiers:
0.29 = ₹280m ÷ (₹1.8b - ₹874m) (Based on the trailing twelve months to June 2019.)
So, Hind Rectifiers has an ROCE of 29%.
See our latest analysis for Hind Rectifiers
Does Hind Rectifiers Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In our analysis, Hind Rectifiers's ROCE is meaningfully higher than the 13% average in the Electrical industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, Hind Rectifiers's ROCE currently appears to be excellent.
In our analysis, Hind Rectifiers's ROCE appears to be 29%, compared to 3 years ago, when its ROCE was 3.6%. This makes us wonder if the company is improving. You can see in the image below how Hind Rectifiers's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for Hind Rectifiers.
What Are Current Liabilities, And How Do They Affect Hind Rectifiers'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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Hind Rectifiers has total assets of ₹1.8b and current liabilities of ₹874m. As a result, its current liabilities are equal to approximately 47% of its total assets. Hind Rectifiers's ROCE is boosted somewhat by its middling amount of current liabilities.
Our Take On Hind Rectifiers's ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Hind Rectifiers looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
