Should Binasat Communications Berhad’s (KLSE:BINACOM) Weak Investment Returns Worry You? – Simply Wall St

Today we are going to look at Binasat Communications Berhad (KLSE:BINACOM) 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.

Firstly, we’ll go over how we calculate ROCE. Then we’ll compare its ROCE 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. 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?

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 Binasat Communications Berhad:

0.051 = RM4.8m ÷ (RM107m – RM11m) (Based on the trailing twelve months to September 2019.)

Therefore, Binasat Communications Berhad has an ROCE of 5.1%.

See our latest analysis for Binasat Communications Berhad

Does Binasat Communications Berhad Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. In this analysis, Binasat Communications Berhad’s ROCE appears meaningfully below the 11% average reported by the Telecom industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how Binasat Communications Berhad stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). Readers may wish to look for more rewarding investments.

Binasat Communications Berhad’s current ROCE of 5.1% is lower than 3 years ago, when the company reported a 36% ROCE. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Binasat Communications Berhad’s past growth compares to other companies.

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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. If Binasat Communications Berhad is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Do Binasat Communications Berhad’s Current Liabilities Skew Its ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Binasat Communications Berhad has total assets of RM107m and current liabilities of RM11m. As a result, its current liabilities are equal to approximately 11% of its total assets. This is a modest level of current liabilities, which will have a limited impact on the ROCE.

What We Can Learn From Binasat Communications Berhad’s ROCE

While that is good to see, Binasat Communications Berhad has a low ROCE and does not look attractive in this analysis. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

I will like Binasat Communications Berhad better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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