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Today we’ll look at Dwarikesh Sugar Industries Limited (NSE:DWARKESH) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 Dwarikesh Sugar Industries:
0.067 = ₹1.1b ÷ (₹8.4b – ₹3.9b) (Based on the trailing twelve months to December 2018.)
Therefore, Dwarikesh Sugar Industries has an ROCE of 6.7%.
Is Dwarikesh Sugar Industries’s ROCE Good?
One way to assess ROCE is to compare similar companies. In this analysis, Dwarikesh Sugar Industries’s ROCE appears meaningfully below the 13% average reported by the Food industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Dwarikesh Sugar Industries’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
Dwarikesh Sugar Industries has an ROCE of 6.7%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. That suggests the business has returned to profitability.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Dwarikesh Sugar Industries is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Dwarikesh Sugar Industries’s Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counter this, investors can check if a company has high current liabilities relative to total assets.
Dwarikesh Sugar Industries has total assets of ₹8.4b and current liabilities of ₹3.9b. Therefore its current liabilities are equivalent to approximately 46% of its total assets. Dwarikesh Sugar Industries has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.
Our Take On Dwarikesh Sugar Industries’s ROCE
This company may not be the most attractive investment prospect. But note: Dwarikesh Sugar Industries may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
I will like Dwarikesh Sugar Industries better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.
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