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How Do Bojun Education Company Limited’s (HKG:1758) Returns On Capital Compare To Peers?

Simply Wall St

Today we'll evaluate Bojun Education Company Limited (HKG:1758) to determine whether it could have potential as an investment idea. 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, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

Return On Capital Employed (ROCE): What is it?

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'.

So, How Do We Calculate ROCE?

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 Bojun Education:

0.036 = CN¥40m ÷ (CN¥1.7b - CN¥626m) (Based on the trailing twelve months to February 2020.)

Therefore, Bojun Education has an ROCE of 3.6%.

See our latest analysis for Bojun Education

Does Bojun Education Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Bojun Education's ROCE appears to be significantly below the 11% average in the Consumer Services industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Bojun Education's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. Readers may wish to look for more rewarding investments.

We can see that, Bojun Education currently has an ROCE of 3.6%, less than the 10% it reported 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Bojun Education's ROCE compares to its industry. Click to see more on past growth.

SEHK:1758 Past Revenue and Net Income April 29th 2020

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. How cyclical is Bojun Education? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Bojun Education's 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Bojun Education has total assets of CN¥1.7b and current liabilities of CN¥626m. Therefore its current liabilities are equivalent to approximately 36% of its total assets. In light of sufficient current liabilities to noticeably boost the ROCE, Bojun Education's ROCE is concerning.

Our Take On Bojun Education's ROCE

This company may not be the most attractive investment prospect. Of course, you might also be able to find a better stock than Bojun Education. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.

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. Thank you for reading.