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Today we'll evaluate Bharatiya Global Infomedia Limited (NSE:BGLOBAL) to determine whether it could have potential as an investment idea. 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 of all, we'll work out how to calculate ROCE. Next, we'll compare it to others in its industry. Finally, we'll look at how its current liabilities affect 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. All else being equal, a better business will have a higher ROCE. 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?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
Or for Bharatiya Global Infomedia:
0.0098 = ₹9.5m ÷ (₹1.5b - ₹489m) (Based on the trailing twelve months to March 2019.)
So, Bharatiya Global Infomedia has an ROCE of 1.0%.
View our latest analysis for Bharatiya Global Infomedia
Does Bharatiya Global Infomedia Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Bharatiya Global Infomedia's ROCE appears to be significantly below the 14% average in the IT industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Bharatiya Global Infomedia's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
Bharatiya Global Infomedia's current ROCE of 1.0% is lower than 3 years ago, when the company reported a 1.6% ROCE. This makes us wonder if the business is facing new challenges.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. You can check if Bharatiya Global Infomedia has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.