In This Article:
Today we'll look at Begbies Traynor Group plc (LON:BEG) and reflect on its potential as an investment. 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. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.
Understanding 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. Ultimately, it is a useful but imperfect metric. 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'.
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 Begbies Traynor Group:
0.053 = UK£4.0m ÷ (UK£101m - UK£25m) (Based on the trailing twelve months to April 2019.)
Therefore, Begbies Traynor Group has an ROCE of 5.3%.
View our latest analysis for Begbies Traynor Group
Is Begbies Traynor Group's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Begbies Traynor Group's ROCE is meaningfully below the Professional Services industry average of 19%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Begbies Traynor Group's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
In our analysis, Begbies Traynor Group's ROCE appears to be 5.3%, compared to 3 years ago, when its ROCE was 3.1%. This makes us think the business might be improving. You can see in the image below how Begbies Traynor Group's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. 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 only a point-in-time measure. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.