Is Korado-Bulgaria AD’s (BUL:4KX) 18% ROCE Any Good?

Today we'll look at Korado-Bulgaria AD (BUL:4KX) and reflect on its potential as an investment. 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 of all, we'll work out how to 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.

What is 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?

The formula for calculating the return on capital employed is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

Or for Korado-Bulgaria AD:

0.18 = лв4.7m ÷ (лв30m - лв3.5m) (Based on the trailing twelve months to March 2020.)

So, Korado-Bulgaria AD has an ROCE of 18%.

See our latest analysis for Korado-Bulgaria AD

Does Korado-Bulgaria AD Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, we find that Korado-Bulgaria AD's ROCE is meaningfully better than the 10% average in the Building 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 where Korado-Bulgaria AD sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

You can see in the image below how Korado-Bulgaria AD's ROCE compares to its industry. Click to see more on past growth.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Since the future is so important for investors, you should check out our free report on analyst forecasts for Korado-Bulgaria AD.

How Korado-Bulgaria AD's Current Liabilities Impact Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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.

Korado-Bulgaria AD has total assets of лв30m and current liabilities of лв3.5m. As a result, its current liabilities are equal to approximately 12% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

The Bottom Line On Korado-Bulgaria AD's ROCE

With that in mind, Korado-Bulgaria AD's ROCE appears pretty good. Korado-Bulgaria AD looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.

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

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.