What Does BVZ Holding AG’s (VTX:BVZN) 7.4% ROCE Say About The Business?
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Today we'll evaluate BVZ Holding AG (VTX:BVZN) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. Generally speaking a higher ROCE is better. 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?
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 BVZ Holding:
0.074 = CHF26m ÷ (CHF379m - CHF33m) (Based on the trailing twelve months to December 2018.)
So, BVZ Holding has an ROCE of 7.4%.
View our latest analysis for BVZ Holding
Is BVZ Holding's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, BVZ Holding's ROCE appears to be around the 9.1% average of the Transportation industry. Separate from how BVZ Holding stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Investors may wish to consider higher-performing investments.
As we can see, BVZ Holding currently has an ROCE of 7.4% compared to its ROCE 3 years ago, which was 3.8%. This makes us wonder if the company is improving.
It is important to remember that ROCE shows past performance, and is 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. If BVZ Holding is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
BVZ Holding's Current Liabilities And Their Impact On 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.
BVZ Holding has total liabilities of CHF33m and total assets of CHF379m. As a result, its current liabilities are equal to approximately 8.6% of its total assets. BVZ Holding reports few current liabilities, which have a negligible impact on its unremarkable ROCE.
The Bottom Line On BVZ Holding's ROCE
If performance improves, then BVZ Holding may be an OK investment, especially at the right valuation. Of course, you might also be able to find a better stock than BVZ Holding. So you may wish to see this free collection of other companies that have grown earnings strongly.
For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.
