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Today we are going to look at BioNeutra Global Corporation (CVE:BGA) 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.
Return On Capital Employed (ROCE): What is it?
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. 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?
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 BioNeutra Global:
0.16 = -CA$64.1k ÷ (CA$39m - CA$14m) (Based on the trailing twelve months to September 2018.)
So, BioNeutra Global has an ROCE of 16%.
Is BioNeutra Global's ROCE Good?
One way to assess ROCE is to compare similar companies. Using our data, BioNeutra Global's ROCE appears to be significantly below the 23% average in the Personal Products industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Separate from BioNeutra Global's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
As we can see, BioNeutra Global currently has an ROCE of 16% compared to its ROCE 3 years ago, which was 8.7%. This makes us think about whether the company has been reinvesting shrewdly.
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. You can check if BioNeutra Global has cyclical profits by looking at this freegraph of past earnings, revenue and cash flow.
What Are Current Liabilities, And How Do They Affect BioNeutra Global's 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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
BioNeutra Global has total liabilities of CA$14m and total assets of CA$39m. As a result, its current liabilities are equal to approximately 36% of its total assets. BioNeutra Global has a middling amount of current liabilities, increasing its ROCE somewhat.
Our Take On BioNeutra Global's ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this freelist of companies with modest (or no) debt, trading on a P/E below 20.
For those who like to find winning investments this freelist 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 firstname.lastname@example.org.