Today we'll look at Bakkavor Group plc (LON:BAKK) 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.
First up, we'll look at what ROCE is and how we calculate it. 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 measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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?
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 Bakkavor Group:
0.12 = UK£112m ÷ (UK£1.3b - UK£408m) (Based on the trailing twelve months to December 2018.)
Therefore, Bakkavor Group has an ROCE of 12%.
Does Bakkavor Group Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. We can see Bakkavor Group's ROCE is around the 12% average reported by the Food industry. Separate from Bakkavor Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
The image below shows how Bakkavor Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Bakkavor Group.
What Are Current Liabilities, And How Do They Affect Bakkavor Group's ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Bakkavor Group has total liabilities of UK£408m and total assets of UK£1.3b. As a result, its current liabilities are equal to approximately 31% of its total assets. Bakkavor Group has a middling amount of current liabilities, increasing its ROCE somewhat.
The Bottom Line On Bakkavor Group's ROCE
Bakkavor Group's ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than Bakkavor Group out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.