Why We Like BMTC Group Inc.’s (TSE:GBT) 29% Return On Capital Employed
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Today we’ll look at BMTC Group Inc. (TSE:GBT) and reflect on its potential as an investment. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First of all, we’ll work out how to 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 measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. 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.’
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 BMTC Group:
0.29 = CA$60m ÷ (CA$313m – CA$108m) (Based on the trailing twelve months to January 2018.)
Therefore, BMTC Group has an ROCE of 29%.
See our latest analysis for BMTC Group
Does BMTC Group Have A Good ROCE?
One way to assess ROCE is to compare similar companies. BMTC Group’s ROCE appears to be substantially greater than the 9.7% average in the Specialty Retail 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 the industry comparison, in absolute terms, BMTC Group’s ROCE currently appears to be excellent.
Our data shows that BMTC Group currently has an ROCE of 29%, compared to its ROCE of 22% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly.
When considering this metric, keep in mind that it is backwards looking, and 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for BMTC Group.
What Are Current Liabilities, And How Do They Affect BMTC Group’s 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
BMTC Group has total assets of CA$313m and current liabilities of CA$108m. As a result, its current liabilities are equal to approximately 35% of its total assets. BMTC Group has a medium level of current liabilities, boosting its ROCE somewhat.
Our Take On BMTC Group’s ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. You might be able to find a better buy than BMTC 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).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
