How Do Aviat Networks, Inc.’s (NASDAQ:AVNW) Returns Compare To Its Industry?
Today we'll look at Aviat Networks, Inc. (NASDAQ:AVNW) 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.
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.
What is Return On Capital Employed (ROCE)?
ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
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 Aviat Networks:
0.027 = US$2.2m ÷ (US$167m - US$85m) (Based on the trailing twelve months to March 2019.)
So, Aviat Networks has an ROCE of 2.7%.
Check out our latest analysis for Aviat Networks
Is Aviat Networks's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Aviat Networks's ROCE appears to be significantly below the 6.7% average in the Communications industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Aviat Networks compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. Readers may wish to look for more rewarding investments.
Aviat Networks has an ROCE of 2.7%, but it didn't have an ROCE 3 years ago, since it was unprofitable. That implies the business has been improving. You can see in the image below how Aviat Networks'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. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Aviat Networks has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Aviat Networks's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.
Aviat Networks has total assets of US$167m and current liabilities of US$85m. Therefore its current liabilities are equivalent to approximately 51% of its total assets. Aviat Networks has a fairly high level of current liabilities, boosting its ROCE.
Our Take On Aviat Networks's ROCE
Unfortunately, its ROCE is also pretty low, so we are cautious about the stock. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
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. Thank you for reading.
