In This Article:
Today we'll look at Braime Group PLC (LON:BMT) and reflect on its potential as an investment. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the 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. 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?
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 Braime Group:
0.20 = UK£3.0m ÷ (UK£23m - UK£8.4m) (Based on the trailing twelve months to December 2018.)
Therefore, Braime Group has an ROCE of 20%.
Check out our latest analysis for Braime Group
Does Braime Group Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Braime Group's ROCE appears to be substantially greater than the 13% average in the Trade Distributors industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Putting aside its position relative to its industry for now, in absolute terms, Braime Group's ROCE is currently very good.
In our analysis, Braime Group's ROCE appears to be 20%, compared to 3 years ago, when its ROCE was 8.9%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Braime Group'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. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is Braime Group? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.