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Here’s why Beasley Broadcast Group, Inc.’s (NASDAQ:BBGI) Returns On Capital Matters So Much

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Today we’ll look at Beasley Broadcast Group, Inc. (NASDAQ:BBGI) and reflect on its potential as an investment. 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. 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.

Return On Capital Employed (ROCE): What is it?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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’.

How Do You Calculate Return On Capital Employed?

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 Beasley Broadcast Group:

0.06 = US$39m ÷ (US$682m – US$35m) (Based on the trailing twelve months to December 2018.)

Therefore, Beasley Broadcast Group has an ROCE of 6.0%.

Check out our latest analysis for Beasley Broadcast Group

Is Beasley Broadcast Group’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Beasley Broadcast Group’s ROCE appears to be significantly below the 8.2% average in the Media industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, Beasley Broadcast Group’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

NASDAQGM:BBGI Last Perf February 14th 19
NASDAQGM:BBGI Last Perf February 14th 19

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, after all, simply a snap shot of a single year. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Beasley Broadcast Group.

How Beasley Broadcast Group’s Current Liabilities Impact Its ROCE

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.

Beasley Broadcast Group has total liabilities of US$35m and total assets of US$682m. As a result, its current liabilities are equal to approximately 5.1% of its total assets. With low levels of current liabilities, at least Beasley Broadcast Group’s mediocre ROCE is not unduly boosted.

What We Can Learn From Beasley Broadcast Group’s ROCE

If performance improves, then Beasley Broadcast Group may be an OK investment, especially at the right valuation. You might be able to find a better buy than Beasley Broadcast Group. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.