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

Simply Wall St

Today we'll look at Beasley Broadcast Group, Inc. (NASDAQ:BBGI) and reflect on its potential as an investment. 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, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect 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. 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.'

How Do You Calculate Return On Capital Employed?

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 Beasley Broadcast Group:

0.055 = US$38m ÷ (US$724m - US$37m) (Based on the trailing twelve months to June 2019.)

So, Beasley Broadcast Group has an ROCE of 5.5%.

View our latest analysis for Beasley Broadcast Group

Is Beasley Broadcast Group's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, Beasley Broadcast Group's ROCE appears to be significantly below the 8.8% average in the Media industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Beasley Broadcast Group stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.

The image below shows how Beasley Broadcast Group's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NasdaqGM:BBGI Past Revenue and Net Income, September 2nd 2019

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Beasley Broadcast Group.

How Beasley Broadcast Group's Current Liabilities Impact Its ROCE

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Beasley Broadcast Group has total liabilities of US$37m and total assets of US$724m. As a result, its current liabilities are equal to approximately 5.1% of its total assets. Beasley Broadcast Group has a low level of current liabilities, which have a negligible impact on its already low ROCE.

What We Can Learn From Beasley Broadcast Group's ROCE

Nonetheless, there may be better places to invest your capital. Of course, you might also be able to find a better stock than Beasley Broadcast Group. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you are like me, then you will not want to miss this free list of growing companies that insiders are 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 editorial-team@simplywallst.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.