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Bumitama Agri Ltd. (SGX:P8Z) Earns Among The Best Returns In Its Industry

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Today we are going to look at Bumitama Agri Ltd. (SGX:P8Z) 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.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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'.

So, How Do We Calculate ROCE?

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 Bumitama Agri:

0.18 = Rp1.8t ÷ (Rp17t - Rp6.4t) (Based on the trailing twelve months to December 2018.)

Therefore, Bumitama Agri has an ROCE of 18%.

See our latest analysis for Bumitama Agri

Is Bumitama Agri's ROCE Good?

One way to assess ROCE is to compare similar companies. In our analysis, Bumitama Agri's ROCE is meaningfully higher than the 7.5% average in the Food industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Independently of how Bumitama Agri compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

In our analysis, Bumitama Agri's ROCE appears to be 18%, compared to 3 years ago, when its ROCE was 10%. This makes us think the business might be improving.

SGX:P8Z Past Revenue and Net Income, March 31st 2019

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 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Bumitama Agri.

What Are Current Liabilities, And How Do They Affect Bumitama Agri's 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.

Bumitama Agri has total assets of Rp17t and current liabilities of Rp6.4t. Therefore its current liabilities are equivalent to approximately 39% of its total assets. With this level of current liabilities, Bumitama Agri's ROCE is boosted somewhat.

The Bottom Line On Bumitama Agri's ROCE

With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. 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.

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.