Today we'll evaluate Bird Construction Inc. (TSE:BDT) to determine whether it could have potential as an investment idea. 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. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 Bird Construction:
0.037 = CA$6.7m ÷ (CA$643m - CA$461m) (Based on the trailing twelve months to June 2019.)
So, Bird Construction has an ROCE of 3.7%.
Does Bird Construction Have A Good ROCE?
One way to assess ROCE is to compare similar companies. In this analysis, Bird Construction's ROCE appears meaningfully below the 8.3% average reported by the Construction industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Bird Construction 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.
Bird Construction's current ROCE of 3.7% is lower than its ROCE in the past, which was 27%, 3 years ago. So investors might consider if it has had issues recently. The image below shows how Bird Construction's ROCE compares to its industry, and you can click it to see more detail on its past growth.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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, 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 Bird Construction's Current Liabilities Impact 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 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.
Bird Construction has total assets of CA$643m and current liabilities of CA$461m. As a result, its current liabilities are equal to approximately 72% of its total assets. Bird Construction has a fairly high level of current liabilities, boosting its ROCE.
What We Can Learn From Bird Construction's ROCE
Unfortunately, its ROCE is also pretty low, so we are cautious about the stock. Of course, you might also be able to find a better stock than Bird Construction. 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 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.