Yahoo Finance Why BHCC Holding Limited’s (HKG:1552) Return On Capital Employed Looks Uninspiring
Today we are going to look at BHCC Holding Limited (HKG:1552) to see whether it might be an attractive investment prospect. 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. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding 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. 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.
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 BHCC Holding:
0.045 = S$2.7m ÷ (S$89m - S$30m) (Based on the trailing twelve months to June 2019.)
Therefore, BHCC Holding has an ROCE of 4.5%.
View our latest analysis for BHCC Holding
Is BHCC Holding's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see BHCC Holding's ROCE is meaningfully below the Construction industry average of 12%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how BHCC Holding compares to its industry, its ROCE in absolute terms is low; especially compared to the ~1.6% available in government bonds. It is likely that there are more attractive prospects out there.
We can see that, BHCC Holding currently has an ROCE of 4.5%, less than the 41% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how BHCC Holding's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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, after all, simply a snap shot of a single year. If BHCC Holding is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
Do BHCC Holding's Current Liabilities Skew Its ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
BHCC Holding has total liabilities of S$30m and total assets of S$89m. As a result, its current liabilities are equal to approximately 34% of its total assets. With a medium level of current liabilities boosting the ROCE a little, BHCC Holding's low ROCE is unappealing.
Our Take On BHCC Holding's ROCE
There are likely better investments out there. Of course, you might also be able to find a better stock than BHCC Holding. 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.
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.
