Is Bombardier Inc. (TSE:BBD.B) Investing Your Capital Efficiently?

Today we'll evaluate Bombardier Inc. (TSE:BBD.B) to determine whether it could have potential as an investment idea. 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

How Do You Calculate Return On Capital Employed?

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 Bombardier:

0.061 = US$793m ÷ (US$27b - US$14b) (Based on the trailing twelve months to June 2019.)

Therefore, Bombardier has an ROCE of 6.1%.

View our latest analysis for Bombardier

Is Bombardier's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Bombardier's ROCE appears to be significantly below the 10% average in the Aerospace & Defense industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Setting aside the industry comparison for now, Bombardier's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.

In our analysis, Bombardier's ROCE appears to be 6.1%, compared to 3 years ago, when its ROCE was 0.8%. This makes us think about whether the company has been reinvesting shrewdly. Take a look at the image below to see how Bombardier's past growth compares to the average in its industry.

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Bombardier.

Do Bombardier's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

Bombardier has total assets of US$27b and current liabilities of US$14b. As a result, its current liabilities are equal to approximately 51% of its total assets. With a high level of current liabilities, Bombardier will experience a boost to its ROCE.

What We Can Learn From Bombardier's ROCE

Notably, it also has a mediocre ROCE, which to my mind is not an appealing combination. You might be able to find a better investment than Bombardier. 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).

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

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.

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. Thank you for reading.