Today we are going to look at Deepak Fertilisers And Petrochemicals Corporation Limited (NSE:DEEPAKFERT) 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. 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 amount of pre-tax profits a company can generate from the 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.'
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 Deepak Fertilisers And Petrochemicals:
0.072 = ₹2.9b ÷ (₹71b - ₹32b) (Based on the trailing twelve months to June 2019.)
Therefore, Deepak Fertilisers And Petrochemicals has an ROCE of 7.2%.
Does Deepak Fertilisers And Petrochemicals Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, Deepak Fertilisers And Petrochemicals's ROCE appears meaningfully below the 17% average reported by the Chemicals industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Deepak Fertilisers And Petrochemicals's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
Deepak Fertilisers And Petrochemicals's current ROCE of 7.2% is lower than 3 years ago, when the company reported a 13% ROCE. So investors might consider if it has had issues recently. The image below shows how Deepak Fertilisers And Petrochemicals's ROCE compares to its industry, and you can click it to see more detail on its 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Deepak Fertilisers And Petrochemicals's Current Liabilities And Their Impact On 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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Deepak Fertilisers And Petrochemicals has total assets of ₹71b and current liabilities of ₹32b. Therefore its current liabilities are equivalent to approximately 44% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Deepak Fertilisers And Petrochemicals's ROCE is concerning.
The Bottom Line On Deepak Fertilisers And Petrochemicals's ROCE
This company may not be the most attractive investment prospect. Of course, you might also be able to find a better stock than Deepak Fertilisers And Petrochemicals. 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).
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