Yahoo Finance Is Brisbane Broncos Limited's (ASX:BBL) Capital Allocation Ability Worth Your Time?
Today we are going to look at Brisbane Broncos Limited (ASX:BBL) to see whether it might be an attractive investment prospect. 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, we'll go over how we 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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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.
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 Brisbane Broncos:
0.08 = AU$3.1m ÷ (AU$51m - AU$12m) (Based on the trailing twelve months to December 2019.)
Therefore, Brisbane Broncos has an ROCE of 8.0%.
View our latest analysis for Brisbane Broncos
Is Brisbane Broncos's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, Brisbane Broncos's ROCE appears to be around the 9.6% average of the Entertainment industry. Setting aside the industry comparison for now, Brisbane Broncos's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
The image below shows how Brisbane Broncos's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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. ROCE is only a point-in-time measure. If Brisbane Broncos is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do Brisbane Broncos's Current Liabilities Skew 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Brisbane Broncos has current liabilities of AU$12m and total assets of AU$51m. Therefore its current liabilities are equivalent to approximately 24% of its total assets. This very reasonable level of current liabilities would not boost the ROCE by much.
The Bottom Line On Brisbane Broncos's ROCE
With that in mind, we're not overly impressed with Brisbane Broncos's ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than Brisbane Broncos. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
