Today we are going to look at BD Multimedia SA (EPA:ALBDM) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the 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.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. 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.
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 BD Multimedia:
0.64 = €2.1m ÷ (€8.7m - €5.5m) (Based on the trailing twelve months to June 2019.)
So, BD Multimedia has an ROCE of 64%.
Is BD Multimedia's ROCE Good?
One way to assess ROCE is to compare similar companies. BD Multimedia's ROCE appears to be substantially greater than the 13% average in the IT industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, BD Multimedia's ROCE currently appears to be excellent.
BD Multimedia reported an ROCE of 64% -- better than 3 years ago, when the company didn't make a profit. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how BD Multimedia'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 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 BD Multimedia has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How BD Multimedia's Current Liabilities Impact 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.
BD Multimedia has total assets of €8.7m and current liabilities of €5.5m. As a result, its current liabilities are equal to approximately 62% of its total assets. While a high level of current liabilities boosts its ROCE, BD Multimedia's returns are still very good.
What We Can Learn From BD Multimedia's ROCE
So to us, the company is potentially worth investigating further. BD Multimedia looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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