U.S. Markets close in 1 hr 5 mins

Brisbane Broncos Limited’s (ASX:BBL) Investment Returns Are Lagging Its Industry

Simply Wall St

Today we'll look at Brisbane Broncos Limited (ASX:BBL) 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.

Firstly, 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.

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

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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?

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 Brisbane Broncos:

0.029 = AU$1.1m ÷ (AU$50m - AU$12m) (Based on the trailing twelve months to June 2019.)

So, Brisbane Broncos has an ROCE of 2.9%.

View our latest analysis for Brisbane Broncos

Does Brisbane Broncos Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Using our data, Brisbane Broncos's ROCE appears to be significantly below the 9.6% average in the Entertainment industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Brisbane Broncos'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 , Brisbane Broncos currently has an ROCE of 2.9%, less than the 12% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Brisbane Broncos's ROCE compares to its industry, and you can click it to see more detail on its past growth.

ASX:BBL Past Revenue and Net Income, September 13th 2019

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. ROCE is, after all, simply a snap shot of a single year. If Brisbane Broncos is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

How Brisbane Broncos's Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Brisbane Broncos has total assets of AU$50m and current liabilities of AU$12m. As a result, its current liabilities are equal to approximately 25% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

The Bottom Line On Brisbane Broncos's ROCE

Brisbane Broncos has a poor ROCE, and there may be better investment prospects out there. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like Brisbane Broncos better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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.