Today we are going to look at JBB Builders International Limited (HKG:1903) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First of all, we'll work out how to 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 measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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 JBB Builders International:
0.19 = RM26m ÷ (RM344m - RM204m) (Based on the trailing twelve months to June 2019.)
Therefore, JBB Builders International has an ROCE of 19%.
Does JBB Builders International Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that JBB Builders International's ROCE is meaningfully better than the 12% average in the Construction 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 JBB Builders International compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
We can see that, JBB Builders International currently has an ROCE of 19%, less than the 60% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how JBB Builders International's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is, after all, simply a snap shot of a single year. If JBB Builders International is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How JBB Builders International's Current Liabilities Impact 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 counter this, investors can check if a company has high current liabilities relative to total assets.
JBB Builders International has total assets of RM344m and current liabilities of RM204m. Therefore its current liabilities are equivalent to approximately 59% of its total assets. JBB Builders International's current liabilities are fairly high, which increases its ROCE significantly.
What We Can Learn From JBB Builders International's ROCE
The ROCE would not look as appealing if the company had fewer current liabilities. There might be better investments than JBB Builders International out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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