Today we'll evaluate Beacon Lighting Group Limited (ASX:BLX) to determine whether it could have potential as an investment idea. 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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 Beacon Lighting Group:
0.23 = AU$25m ÷ (AU$165m - AU$58m) (Based on the trailing twelve months to June 2019.)
Therefore, Beacon Lighting Group has an ROCE of 23%.
Is Beacon Lighting Group's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Beacon Lighting Group's ROCE is meaningfully better than the 15% average in the Specialty Retail industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, Beacon Lighting Group's ROCE is currently very good.
Beacon Lighting Group's current ROCE of 23% is lower than 3 years ago, when the company reported a 44% ROCE. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how Beacon Lighting Group's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How Beacon Lighting Group'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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Beacon Lighting Group has total assets of AU$165m and current liabilities of AU$58m. Therefore its current liabilities are equivalent to approximately 35% of its total assets. Beacon Lighting Group's ROCE is boosted somewhat by its middling amount of current liabilities.
Our Take On Beacon Lighting Group's ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. There might be better investments than Beacon Lighting Group 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.
I will like Beacon Lighting Group 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 email@example.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.