Has KBJ S.A. (WSE:KBJ) Been Employing Capital Shrewdly?

By
Simply Wall St
Published
May 18, 2020
WSE:KBJ

Today we are going to look at KBJ S.A. (WSE:KBJ) 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

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.

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 KBJ:

0.20 = zł1.9m ÷ (zł18m - zł8.9m) (Based on the trailing twelve months to December 2019.)

Therefore, KBJ has an ROCE of 20%.

See our latest analysis for KBJ

Is KBJ's ROCE Good?

One way to assess ROCE is to compare similar companies. It appears that KBJ's ROCE is fairly close to the IT industry average of 20%. Independently of how KBJ compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

KBJ's current ROCE of 20% is lower than its ROCE in the past, which was 30%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how KBJ's past growth compares to other companies.

WSE:KBJ Past Revenue and Net Income May 18th 2020
WSE:KBJ Past Revenue and Net Income May 18th 2020

When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is KBJ? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect KBJ's 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

KBJ has total assets of zł18m and current liabilities of zł8.9m. As a result, its current liabilities are equal to approximately 49% of its total assets. KBJ has a medium level of current liabilities, which would boost the ROCE.

The Bottom Line On KBJ's ROCE

With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. KBJ shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email 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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Thank you for reading.

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