U.S. markets close in 4 hours 28 minutes

Why Brooge Holdings Limited’s (NASDAQ:BROG) Return On Capital Employed Is Impressive

Simply Wall St

Today we'll look at Brooge Holdings Limited (NASDAQ:BROG) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

Firstly, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. 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. 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'.

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 Brooge Holdings:

0.24 = US$32m ÷ (US$247m - US$113m) (Based on the trailing twelve months to June 2019.)

Therefore, Brooge Holdings has an ROCE of 24%.

View our latest analysis for Brooge Holdings

Is Brooge Holdings's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Brooge Holdings's ROCE appears to be substantially greater than the 7.3% average in the Oil and Gas 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, Brooge Holdings's ROCE currently appears to be excellent.

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

NasdaqCM:BROG Past Revenue and Net Income, March 23rd 2020

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Remember that most companies like Brooge Holdings are cyclical businesses. You can check if Brooge Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How Brooge Holdings'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.

Brooge Holdings has current liabilities of US$113m and total assets of US$247m. Therefore its current liabilities are equivalent to approximately 46% of its total assets. Brooge Holdings has a medium level of current liabilities, boosting its ROCE somewhat.

The Bottom Line On Brooge Holdings's ROCE

Despite this, it reports a high ROCE, and may be worth investigating further. There might be better investments than Brooge Holdings out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

I will like Brooge Holdings better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.

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. Thank you for reading.