Boyuan Construction Group, Inc. (TSE:BOY) Earns A Nice Return On Capital Employed
Today we'll evaluate Boyuan Construction Group, Inc. (TSE:BOY) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared 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 amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
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 Boyuan Construction Group:
0.12 = US$18m ÷ (US$328m - US$172m) (Based on the trailing twelve months to December 2019.)
So, Boyuan Construction Group has an ROCE of 12%.
Check out our latest analysis for Boyuan Construction Group
Does Boyuan Construction Group Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Boyuan Construction Group's ROCE is meaningfully better than the 9.0% average in the Construction industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Boyuan Construction Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, Boyuan Construction Group currently has an ROCE of 12% compared to its ROCE 3 years ago, which was 1.9%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how Boyuan Construction Group's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. You can check if Boyuan Construction Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Boyuan Construction Group's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Boyuan Construction Group has total assets of US$328m and current liabilities of US$172m. As a result, its current liabilities are equal to approximately 52% of its total assets. This is admittedly a high level of current liabilities, improving ROCE substantially.
Our Take On Boyuan Construction Group's ROCE
While its ROCE looks decent, it wouldn't look so good if it reduced current liabilities. There might be better investments than Boyuan Construction Group out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
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. Thank you for reading.
