Today we are going to look at Beam Communications Holdings Limited (ASX:BCC) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.

Return On Capital Employed (ROCE): What is it?

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. 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 Beam Communications Holdings:

0.14 = AU$1.2m ÷ (AU$14m - AU$5.6m) (Based on the trailing twelve months to June 2019.)

Therefore, Beam Communications Holdings has an ROCE of 14%.

View our latest analysis for Beam Communications Holdings

Does Beam Communications Holdings Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. Beam Communications Holdings's ROCE appears to be substantially greater than the 7.2% average in the Communications 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. Regardless of where Beam Communications Holdings sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

We can see that, Beam Communications Holdings currently has an ROCE of 14% compared to its ROCE 3 years ago, which was 6.0%. This makes us think about whether the company has been reinvesting shrewdly. You can click on the image below to see (in greater detail) how Beam Communications Holdings's past growth compares to other companies.

When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. ROCE is only a point-in-time measure. How cyclical is Beam Communications Holdings? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.