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Are Honeywell Automation India Limited’s (NSE:HONAUT) High Returns Really That Great?

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Simply Wall St
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Today we'll look at Honeywell Automation India Limited (NSE:HONAUT) 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, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared 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 is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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?

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 Honeywell Automation India:

0.30 = ₹5.3b ÷ (₹29b - ₹11b) (Based on the trailing twelve months to June 2019.)

So, Honeywell Automation India has an ROCE of 30%.

See our latest analysis for Honeywell Automation India

Is Honeywell Automation India's ROCE Good?

One way to assess ROCE is to compare similar companies. In our analysis, Honeywell Automation India's ROCE is meaningfully higher than the 14% average in the Electronic 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, Honeywell Automation India's ROCE currently appears to be excellent.

We can see that, Honeywell Automation India currently has an ROCE of 30% compared to its ROCE 3 years ago, which was 18%. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Honeywell Automation India's ROCE compares to its industry. Click to see more on past growth.

NSEI:HONAUT Past Revenue and Net Income, October 14th 2019
NSEI:HONAUT Past Revenue and Net Income, October 14th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 Honeywell Automation India.

What Are Current Liabilities, And How Do They Affect Honeywell Automation India's 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Honeywell Automation India has total assets of ₹29b and current liabilities of ₹11b. Therefore its current liabilities are equivalent to approximately 38% of its total assets. Honeywell Automation India has a medium level of current liabilities, boosting its ROCE somewhat.

What We Can Learn From Honeywell Automation India's ROCE

Still, it has a high ROCE, and may be an interesting prospect for further research. There might be better investments than Honeywell Automation India 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.

I will like Honeywell Automation India 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.