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Today we are going to look at BYD Electronic (International) Company Limited (HKG:285) 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 up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
What is 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. 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.'
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 BYD Electronic (International):
0.11 = CN¥1.8b ÷ (CN¥26b - CN¥10b) (Based on the trailing twelve months to December 2018.)
Therefore, BYD Electronic (International) has an ROCE of 11%.
Does BYD Electronic (International) Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see BYD Electronic (International)'s ROCE is around the 13% average reported by the Communications industry. Separate from BYD Electronic (International)'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 , BYD Electronic (International) currently has an ROCE of 11% compared to its ROCE 3 years ago, which was 5.1%. This makes us think the business might be improving. You can click on the image below to see (in greater detail) how BYD Electronic (International)'s past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
How BYD Electronic (International)'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. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
BYD Electronic (International) has total liabilities of CN¥10b and total assets of CN¥26b. As a result, its current liabilities are equal to approximately 39% of its total assets. BYD Electronic (International) has a medium level of current liabilities, which would boost the ROCE.
The Bottom Line On BYD Electronic (International)'s ROCE
BYD Electronic (International)'s ROCE does look good, but the level of current liabilities also contribute to that. BYD Electronic (International) 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.
I will like BYD Electronic (International) better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.