Yahoo Finance Why We Like VRL Logistics Limited’s (NSE:VRLLOG) 19% Return On Capital Employed
Today we are going to look at VRL Logistics Limited (NSE:VRLLOG) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding 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. 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.
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 VRL Logistics:
0.19 = ₹1.6b ÷ (₹9.8b - ₹1.2b) (Based on the trailing twelve months to June 2019.)
So, VRL Logistics has an ROCE of 19%.
See our latest analysis for VRL Logistics
Is VRL Logistics's ROCE Good?
One way to assess ROCE is to compare similar companies. In our analysis, VRL Logistics's ROCE is meaningfully higher than the 16% average in the Transportation industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from VRL Logistics's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
You can click on the image below to see (in greater detail) how VRL Logistics's past growth compares to other companies.
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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How VRL Logistics's Current Liabilities Impact Its ROCE
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
VRL Logistics has total assets of ₹9.8b and current liabilities of ₹1.2b. As a result, its current liabilities are equal to approximately 13% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On VRL Logistics's ROCE
This is good to see, and with a sound ROCE, VRL Logistics could be worth a closer look. VRL Logistics shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
I will like VRL Logistics better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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 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.
