Today we are going to look at Beam Communications Holdings Limited (ASX:BCC) 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. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting 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. 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 Beam Communications Holdings:
0.14 = AU$1.2m ÷ (AU$14m - AU$5.6m) (Based on the trailing twelve months to June 2019.)
Therefore, Beam Communications Holdings has an ROCE of 14%.
Does Beam Communications Holdings Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Beam Communications Holdings's ROCE appears to be substantially greater than the 7.2% average in the Communications 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. Regardless of where Beam Communications Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
We can see that, Beam Communications Holdings currently has an ROCE of 14% compared to its ROCE 3 years ago, which was 6.0%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Beam Communications Holdings's past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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 only a point-in-time measure. How cyclical is Beam Communications Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do Beam Communications Holdings's Current Liabilities Skew Its ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Beam Communications Holdings has total liabilities of AU$5.6m and total assets of AU$14m. As a result, its current liabilities are equal to approximately 40% of its total assets. With this level of current liabilities, Beam Communications Holdings's ROCE is boosted somewhat.
Our Take On Beam Communications Holdings's ROCE
Beam Communications Holdings's ROCE does look good, but the level of current liabilities also contribute to that. There might be better investments than Beam Communications Holdings 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.
Beam Communications Holdings is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
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