How Do Bison Finance Group Limited’s (HKG:888) Returns Compare To Its Industry?

Today we are going to look at Bison Finance Group Limited (HKG:888) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the amount of pre-tax profits a company can generate from the capital employed 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?

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 Bison Finance Group:

0.068 = HK$51m ÷ (HK$986m – HK$234m) (Based on the trailing twelve months to June 2019.)

Therefore, Bison Finance Group has an ROCE of 6.8%.

Check out our latest analysis for Bison Finance Group

Is Bison Finance Group’s ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. We can see Bison Finance Group’s ROCE is meaningfully below the Media industry average of 9.5%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Separate from how Bison Finance Group stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. It is possible that there are more rewarding investments out there.

Bison Finance Group has an ROCE of 6.8%, but it didn’t have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving. You can click on the image below to see (in greater detail) how Bison Finance Group’s past growth compares to other companies.

SEHK:888 Past Revenue and Net Income, February 27th 2020
SEHK:888 Past Revenue and Net Income, February 27th 2020

It is important to remember that ROCE shows past performance, and is 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Bison Finance Group? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

How Bison Finance Group’s Current Liabilities Impact 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 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.

Bison Finance Group has total assets of HK$986m and current liabilities of HK$234m. As a result, its current liabilities are equal to approximately 24% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

What We Can Learn From Bison Finance Group’s ROCE

With that in mind, we’re not overly impressed with Bison Finance Group’s ROCE, so it may not be the most appealing prospect. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

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.