Today we are going to look at B.C. Power Controls Limited (NSE:BCP) to see whether it might be an attractive investment prospect. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its 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. 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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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 B.C. Power Controls:
0.15 = ₹44m ÷ (₹859m – ₹559m) (Based on the trailing twelve months to June 2019.)
So, B.C. Power Controls has an ROCE of 15%.
Is B.C. Power Controls’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see B.C. Power Controls’s ROCE is around the 13% average reported by the Electrical industry. Setting aside the industry comparison for now, B.C. Power Controls’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
We can see that, B.C. Power Controls currently has an ROCE of 15% compared to its ROCE 3 years ago, which was 8.5%. This makes us think the business might be improving. The image below shows how B.C. Power Controls’s ROCE compares to its industry.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. How cyclical is B.C. Power Controls? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
Do B.C. Power Controls’s Current Liabilities Skew 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 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 counter this, investors can check if a company has high current liabilities relative to total assets.
B.C. Power Controls has total assets of ₹859m and current liabilities of ₹559m. Therefore its current liabilities are equivalent to approximately 65% of its total assets. B.C. Power Controls’s current liabilities are fairly high, making its ROCE look better than otherwise.
Our Take On B.C. Power Controls’s ROCE
Even so, the company reports a mediocre ROCE, and there may be better investments out there. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
I will like B.C. Power Controls 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 firstname.lastname@example.org. 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.