【are dakota saddles good quality】Is Rallis India Limited (NSE:RALLIS) Better Than Average At Deploying Capital?

Today we’ll look at Rallis are dakota saddles good qualityIndia Limited (

NSE:RALLIS

) 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.

Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE to similar companies. And finally, we’ll look at how its current liabilities are impacting 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. 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 Rallis India:

0.17 = ₹2.2b ÷ (₹22b – ₹8.7b) (Based on the trailing twelve months to December 2018.)

Therefore,

Rallis India has an ROCE of 17%.

Check out our latest analysis for Rallis India

Is Rallis India’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Rallis India’s ROCE appears to be around the 16% average of the Chemicals industry. Regardless of where Rallis India sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

NSEI:RALLIS Past Revenue and Net Income, March 1st 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our

free

report on analyst forecasts for Rallis India

.

Rallis India’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.

Rallis India has total assets of ₹22b and current liabilities of ₹8.7b. As a result, its current liabilities are equal to approximately 39% of its total assets. Rallis India has a middling amount of current liabilities, increasing its ROCE somewhat.

What We Can Learn From Rallis India’s ROCE

Rallis India’s ROCE does look good, but the level of current liabilities also contribute to that. You might be able to find a better buy than Rallis India. If you want a selection of possible winners, check out this

free

list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you are like me, then you will

not

want to miss this

free

list of growing companies that insiders are 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

[email protected]

. 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.

View comments