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Today we are going to look at Fujian Blue Hat Interactive Entertainment Technology Ltd. (NASDAQ:BHAT) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding 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. All else being equal, a better business will have a higher ROCE. 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 Fujian Blue Hat Interactive Entertainment Technology:
0.29 = US$8.3m ÷ (US$35m - US$7.1m) (Based on the trailing twelve months to December 2018.)
So, Fujian Blue Hat Interactive Entertainment Technology has an ROCE of 29%.
Does Fujian Blue Hat Interactive Entertainment Technology Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Fujian Blue Hat Interactive Entertainment Technology's ROCE is meaningfully better than the 8.8% average in the Entertainment industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Setting aside the comparison to its industry for a moment, Fujian Blue Hat Interactive Entertainment Technology's ROCE in absolute terms currently looks quite high.
Fujian Blue Hat Interactive Entertainment Technology's current ROCE of 29% is lower than 3 years ago, when the company reported a 55% ROCE. Therefore we wonder if the company is facing new headwinds. You can see in the image below how Fujian Blue Hat Interactive Entertainment Technology's ROCE compares to its industry. Click to see more on past growth.
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. How cyclical is Fujian Blue Hat Interactive Entertainment Technology? 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 Fujian Blue Hat Interactive Entertainment Technology's 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Fujian Blue Hat Interactive Entertainment Technology has total assets of US$35m and current liabilities of US$7.1m. As a result, its current liabilities are equal to approximately 20% of its total assets. A minimal amount of current liabilities limits the impact on ROCE.
The Bottom Line On Fujian Blue Hat Interactive Entertainment Technology's ROCE
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