Yahoo Finance A Close Look At Boyuan Construction Group, Inc.’s (TSE:BOY) 13% ROCE
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Today we are going to look at Boyuan Construction Group, Inc. (TSE:BOY) 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.
First of all, we’ll work out how to calculate ROCE. Next, we’ll compare it to others in its industry. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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 Boyuan Construction Group:
0.13 = US$12m ÷ (US$269m – US$159m) (Based on the trailing twelve months to September 2018.)
Therefore, Boyuan Construction Group has an ROCE of 13%.
View our latest analysis for Boyuan Construction Group
Does Boyuan Construction Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Boyuan Construction Group’s ROCE appears to be substantially greater than the 10% average in the Construction industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Boyuan Construction Group’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
Boyuan Construction Group’s current ROCE of 13% is lower than 3 years ago, when the company reported a 23% ROCE. This makes us wonder if the business is facing new challenges.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. If Boyuan Construction Group is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect Boyuan Construction 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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Boyuan Construction Group has total liabilities of US$159m and total assets of US$269m. As a result, its current liabilities are equal to approximately 59% of its total assets. This is admittedly a high level of current liabilities, improving ROCE substantially.
What We Can Learn From Boyuan Construction Group’s ROCE
This ROCE is pretty good, but remember that it would look less impressive with fewer current liabilities. You might be able to find a better buy than Boyuan Construction 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).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.