Today we are going to look at Bharatiya Global Infomedia Limited (NSE:BGLOBAL) 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.
Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE 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 measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.
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 Bharatiya Global Infomedia:
0.0051 = ₹5.9m ÷ (₹1.4b – ₹231m) (Based on the trailing twelve months to September 2019.)
Therefore, Bharatiya Global Infomedia has an ROCE of 0.5%.
Does Bharatiya Global Infomedia Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Bharatiya Global Infomedia’s ROCE appears to be significantly below the 14% average in the IT industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Bharatiya Global Infomedia’s performance relative to its industry, its ROCE in absolute terms is poor – considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.
Bharatiya Global Infomedia’s current ROCE of 0.5% is lower than its ROCE in the past, which was 1.4%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Bharatiya Global Infomedia’s past growth compares to other companies.
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. ROCE is only a point-in-time measure. You can check if Bharatiya Global Infomedia has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Bharatiya Global Infomedia’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 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.
Bharatiya Global Infomedia has current liabilities of ₹231m and total assets of ₹1.4b. As a result, its current liabilities are equal to approximately 17% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.
The Bottom Line On Bharatiya Global Infomedia’s ROCE
While that is good to see, Bharatiya Global Infomedia has a low ROCE and does not look attractive in this analysis. You might be able to find a better investment than Bharatiya Global Infomedia. 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).
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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