Today we’ll look at Bombardier Inc. (TSE:BBD.B) 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. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE measures the ‘return’ (pre-tax profit) a company generates from 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.’
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 Bombardier:
0.049 = US$430m ÷ (US$24b – US$11b) (Based on the trailing twelve months to September 2018.)
Therefore, Bombardier has an ROCE of 4.9%.
Does Bombardier Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. We can see Bombardier’s ROCE is meaningfully below the Aerospace & Defense industry average of 9.2%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Regardless of how Bombardier stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.
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 deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Bombardier.
Do Bombardier’s Current Liabilities Skew 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Bombardier has total liabilities of US$11b and total assets of US$24b. Therefore its current liabilities are equivalent to approximately 47% of its total assets. With a medium level of current liabilities boosting the ROCE a little, Bombardier’s low ROCE is unappealing.
What We Can Learn From Bombardier’s ROCE
This company may not be the most attractive investment prospect. You might be able to find a better buy than Bombardier. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
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To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.