Today we'll evaluate Brand Concepts Limited (NSE:BCONCEPTS) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. 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. 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?
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 Brand Concepts:
0.23 = ₹70m ÷ (₹787m - ₹476m) (Based on the trailing twelve months to March 2019.)
Therefore, Brand Concepts has an ROCE of 23%.
View our latest analysis for Brand Concepts
Is Brand Concepts's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Brand Concepts's ROCE appears to be substantially greater than the 13% average in the Specialty Retail industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Brand Concepts'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, Brand Concepts currently has an ROCE of 23%, less than the 44% it reported 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Brand Concepts's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. 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 Brand Concepts? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.