Today we are going to look at Beeks Trading Corporation Ltd. (LON:BKS) to see whether it might be an attractive investment prospect. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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 Beeks Trading:

0.21 = UK£1.3m ÷ (UK£8.2m - UK£1.9m) (Based on the trailing twelve months to June 2019.)

So, Beeks Trading has an ROCE of 21%.

Check out our latest analysis for Beeks Trading

Does Beeks Trading Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Beeks Trading's ROCE appears to be substantially greater than the 12% average in the IT industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Beeks Trading's ROCE is currently very good.

Beeks Trading's current ROCE of 21% is lower than its ROCE in the past, which was 46%, 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how Beeks Trading's ROCE compares to its industry, and you can click it to see more detail on its past growth.

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. 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.