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

Simply Wall St

Today we are going to look at Bojun Education Company Limited (HKG:1758) to see whether it might be an attractive investment prospect. 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. 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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 Bojun Education:

0.033 = CN¥29m ÷ (CN¥1.4b - CN¥495m) (Based on the trailing twelve months to February 2019.)

Therefore, Bojun Education has an ROCE of 3.3%.

Check out 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. In this analysis, Bojun Education's ROCE appears meaningfully below the 10% average reported by the Consumer Services industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Bojun Education stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.

Bojun Education's current ROCE of 3.3% is lower than its ROCE in the past, which was 14%, 3 years ago. This makes us wonder if the business is facing new challenges. The image below shows how Bojun Education's ROCE compares to its industry, and you can click it to see more detail on its past growth.

SEHK:1758 Past Revenue and Net Income, October 30th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. If Bojun Education is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Do Bojun Education's Current Liabilities Skew Its ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Bojun Education has total assets of CN¥1.4b and current liabilities of CN¥495m. 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.

What We Can Learn From Bojun Education's ROCE

This company may not be the most attractive investment prospect. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

Bojun Education is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.