U.S. Markets closed

What Can We Learn From Nitin Spinners Limited’s (NSE:NITINSPIN) Investment Returns?

Simply Wall St

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Today we are going to look at Nitin Spinners Limited (NSE:NITINSPIN) to see whether it might be an attractive investment prospect. 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. Then we'll determine how its current liabilities are affecting its ROCE.

What is Return On Capital Employed (ROCE)?

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

How Do You Calculate Return On Capital Employed?

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 Nitin Spinners:

0.11 = ₹1.2b ÷ (₹14b - ₹2.9b) (Based on the trailing twelve months to March 2019.)

So, Nitin Spinners has an ROCE of 11%.

View our latest analysis for Nitin Spinners

Is Nitin Spinners's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. We can see Nitin Spinners's ROCE is around the 12% average reported by the Luxury industry. Setting aside the industry comparison for now, Nitin Spinners's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

Nitin Spinners's current ROCE of 11% is lower than its ROCE in the past, which was 20%, 3 years ago. So investors might consider if it has had issues recently.

NSEI:NITINSPIN Past Revenue and Net Income, June 17th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during 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 Nitin Spinners.

Do Nitin Spinners's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

Nitin Spinners has total liabilities of ₹2.9b and total assets of ₹14b. As a result, its current liabilities are equal to approximately 20% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.

The Bottom Line On Nitin Spinners's ROCE

If Nitin Spinners continues to earn an uninspiring ROCE, there may be better places to invest. Of course, you might also be able to find a better stock than Nitin Spinners. So you may wish to see this free collection of other companies that have grown earnings strongly.

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.