Today we'll look at BRC Asia Limited (SGX:BEC) and reflect on its potential as an investment. 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.

Understanding 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. In brief, it is a useful tool, but it is not without drawbacks. 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 BRC Asia:

0.14 = S$46m ÷ (S$695m - S$358m) (Based on the trailing twelve months to September 2019.)

So, BRC Asia has an ROCE of 14%.

See our latest analysis for BRC Asia

Does BRC Asia Have A Good ROCE?

One way to assess ROCE is to compare similar companies. In our analysis, BRC Asia's ROCE is meaningfully higher than the 9.4% average in the Building industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from BRC Asia'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, BRC Asia currently has an ROCE of 14% compared to its ROCE 3 years ago, which was 5.0%. This makes us think the business might be improving. The image below shows how BRC Asia's ROCE compares to its industry, and you can click it to see more detail on its past growth.

When considering this metric, keep in mind that it is backwards looking, and 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

How BRC Asia's Current Liabilities Impact 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 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 counteract this, we check if a company has high current liabilities, relative to its total assets.

BRC Asia has total liabilities of S$358m and total assets of S$695m. Therefore its current liabilities are equivalent to approximately 52% of its total assets. BRC Asia's current liabilities are fairly high, which increases its ROCE significantly.

The Bottom Line On BRC Asia's ROCE

This ROCE is pretty good, but remember that it would look less impressive with fewer current liabilities. BRC Asia 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).

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.