Today we’ll evaluate Vidhi Specialty Food Ingredients Limited (NSE:VIDHIING) to determine whether it could have potential as an investment idea. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.

What is Return On Capital Employed (ROCE)?

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. 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 Vidhi Specialty Food Ingredients:

0.38 = ₹291m ÷ (₹1.7b – ₹720m) (Based on the trailing twelve months to September 2018.)

So, Vidhi Specialty Food Ingredients has an ROCE of 38%.

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Is Vidhi Specialty Food Ingredients’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Vidhi Specialty Food Ingredients’s ROCE is meaningfully higher than the 17% average in the Chemicals industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Vidhi Specialty Food Ingredients’s ROCE is currently very good.

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Vidhi Specialty Food Ingredients.

How Vidhi Specialty Food Ingredients’s Current Liabilities Impact 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Vidhi Specialty Food Ingredients has total liabilities of ₹720m and total assets of ₹1.7b. Therefore its current liabilities are equivalent to approximately 43% of its total assets. A medium level of current liabilities boosts Vidhi Specialty Food Ingredients’s ROCE somewhat.

The Bottom Line On Vidhi Specialty Food Ingredients’s ROCE

Despite this, it reports a high ROCE, and may be worth investigating further. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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 editorial-team@simplywallst.com.