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Why Brilliant Circle Holdings International Limited’s (HKG:1008) Use Of Investor Capital Doesn’t Look Great

Simply Wall St

Today we are going to look at Brilliant Circle Holdings International Limited (HKG:1008) to see whether it might be an attractive investment prospect. 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 of all, we'll work out how to calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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?

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 Brilliant Circle Holdings International:

0.055 = HK$162m ÷ (HK$3.8b - HK$867m) (Based on the trailing twelve months to June 2019.)

Therefore, Brilliant Circle Holdings International has an ROCE of 5.5%.

See our latest analysis for Brilliant Circle Holdings International

Does Brilliant Circle Holdings International Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In this analysis, Brilliant Circle Holdings International's ROCE appears meaningfully below the 10% average reported by the Commercial Services industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Separate from how Brilliant Circle Holdings International stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.

Brilliant Circle Holdings International's current ROCE of 5.5% is lower than its ROCE in the past, which was 7.3%, 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Brilliant Circle Holdings International's ROCE compares to its industry, and you can click it to see more detail on its past growth.

SEHK:1008 Past Revenue and Net Income, October 4th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. You can check if Brilliant Circle Holdings International has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How Brilliant Circle Holdings International'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 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Brilliant Circle Holdings International has total assets of HK$3.8b and current liabilities of HK$867m. Therefore its current liabilities are equivalent to approximately 23% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

What We Can Learn From Brilliant Circle Holdings International's ROCE

That said, Brilliant Circle Holdings International's ROCE is mediocre, there may be more attractive investments around. You might be able to find a better investment than Brilliant Circle Holdings International. 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).

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.