Today we are going to look at LifeVantage Corporation (NASDAQ:LFVN) to see whether it might be an attractive investment prospect. 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. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting 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. 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'.
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 LifeVantage:
0.34 = US$9.8m ÷ (US$55m - US$26m) (Based on the trailing twelve months to June 2019.)
Therefore, LifeVantage has an ROCE of 34%.
Is LifeVantage's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that LifeVantage's ROCE is meaningfully better than the 19% average in the Personal Products industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, LifeVantage's ROCE currently appears to be excellent.
We can see that , LifeVantage currently has an ROCE of 34%, less than the 66% it reported 3 years ago. Therefore we wonder if the company is facing new headwinds. The image below shows how LifeVantage's ROCE compares to its industry, and you can click it to see more detail on its 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, after all, simply a snap shot of a single year. You can check if LifeVantage has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
LifeVantage's Current Liabilities And Their Impact On Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To counteract this, we check if a company has high current liabilities, relative to its total assets.
LifeVantage has total liabilities of US$26m and total assets of US$55m. As a result, its current liabilities are equal to approximately 47% of its total assets. LifeVantage's ROCE is boosted somewhat by its middling amount of current liabilities.
What We Can Learn From LifeVantage's ROCE
Despite this, it reports a high ROCE, and may be worth investigating further. LifeVantage shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
I will like LifeVantage better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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 firstname.lastname@example.org. 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.