In This Article:
Today we are going to look at BOE Varitronix Limited (HKG:710) 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. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting 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. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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?
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 BOE Varitronix:
0.011 = HK$29m ÷ (HK$3.5b - HK$762m) (Based on the trailing twelve months to December 2019.)
Therefore, BOE Varitronix has an ROCE of 1.1%.
See our latest analysis for BOE Varitronix
Does BOE Varitronix Have A Good ROCE?
ROCE can be useful when making comparisons, such as between similar companies. We can see BOE Varitronix's ROCE is meaningfully below the Semiconductor industry average of 7.3%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Regardless of how BOE Varitronix stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). There are potentially more appealing investments elsewhere.
BOE Varitronix's current ROCE of 1.1% is lower than its ROCE in the past, which was 3.3%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how BOE Varitronix's ROCE compares to its industry. Click to see more on past growth.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. How cyclical is BOE Varitronix? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.