Are Ban Leong Technologies Limited’s (SGX:B26) High Returns Really That Great?
Today we'll look at Ban Leong Technologies Limited (SGX:B26) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First, 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.
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. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
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 Ban Leong Technologies:
0.13 = S$4.2m ÷ (S$66m - S$34m) (Based on the trailing twelve months to March 2019.)
Therefore, Ban Leong Technologies has an ROCE of 13%.
View our latest analysis for Ban Leong Technologies
Does Ban Leong Technologies Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In our analysis, Ban Leong Technologies's ROCE is meaningfully higher than the 9.1% average in the Electronic industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where Ban Leong Technologies sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
The image below shows how Ban Leong Technologies's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. How cyclical is Ban Leong Technologies? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Ban Leong Technologies's Current Liabilities Skew 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.
Ban Leong Technologies has total liabilities of S$34m and total assets of S$66m. Therefore its current liabilities are equivalent to approximately 51% of its total assets. Ban Leong Technologies has a relatively high level of current liabilities, boosting its ROCE meaningfully.
Our Take On Ban Leong Technologies's ROCE
This ROCE is pretty good, but remember that it would look less impressive with fewer current liabilities. Ban Leong Technologies looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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 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.
