Today we are going to look at Vixtel Technologies Holdings Limited (HKG:1782) to see whether it might be an attractive investment prospect. 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. 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 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. Overall, it is a valuable metric that has its flaws. 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 Vixtel Technologies Holdings:
0.11 = CN¥20m ÷ (CN¥200m - CN¥25m) (Based on the trailing twelve months to June 2019.)
So, Vixtel Technologies Holdings has an ROCE of 11%.
Does Vixtel Technologies Holdings Have A Good ROCE?
One way to assess ROCE is to compare similar companies. We can see Vixtel Technologies Holdings's ROCE is around the 11% average reported by the IT industry. Independently of how Vixtel Technologies Holdings compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Vixtel Technologies Holdings's current ROCE of 11% is lower than 3 years ago, when the company reported a 17% ROCE. So investors might consider if it has had issues recently. You can see in the image below how Vixtel Technologies Holdings's ROCE compares to its industry. Click to see more on past growth.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
What Are Current Liabilities, And How Do They Affect Vixtel Technologies Holdings's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Vixtel Technologies Holdings has total assets of CN¥200m and current liabilities of CN¥25m. As a result, its current liabilities are equal to approximately 13% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
The Bottom Line On Vixtel Technologies Holdings's ROCE
This is good to see, and with a sound ROCE, Vixtel Technologies Holdings could be worth a closer look. Vixtel Technologies Holdings looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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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.