Today we’ll evaluate Bharatiya Global Infomedia Limited (NSE:BGLOBAL) to determine whether it could have potential as an investment idea. 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 up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed 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?
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:
0.025 = ₹24m ÷ (₹1.4b – ₹444m) (Based on the trailing twelve months to December 2018.)
So, Bharatiya Global Infomedia has an ROCE of 2.5%.
Does Bharatiya Global Infomedia Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see Bharatiya Global Infomedia’s ROCE is meaningfully below the IT industry average of 14%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Bharatiya Global Infomedia compares to its industry, its ROCE in absolute terms is low; especially compared to the ~7.6% available in government bonds. Readers may wish to look for more rewarding investments.
Our data shows that Bharatiya Global Infomedia currently has an ROCE of 2.5%, compared to its ROCE of 0.8% 3 years ago. This makes us wonder if the company is improving.
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 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.
Bharatiya Global Infomedia’s Current Liabilities And Their Impact On 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.
Bharatiya Global Infomedia has total liabilities of ₹444m and total assets of ₹1.4b. As a result, its current liabilities are equal to approximately 31% of its total assets. Bharatiya Global Infomedia has a medium level of current liabilities (boosting the ROCE somewhat), and a low ROCE.
What We Can Learn From Bharatiya Global Infomedia’s ROCE
There are likely better investments out there. You might be able to find a better buy 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).
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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If you spot an error that warrants correction, please contact the editor at email@example.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.