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Are Live Ventures Incorporated’s Returns On Capital Worth Investigating?

Simply Wall St

Today we’ll evaluate Live Ventures Incorporated (NASDAQ:LIVE) 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. Second, we’ll look at its ROCE compared 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. In general, businesses with a higher ROCE are usually better quality. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.’

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 Live Ventures:

0.088 = US$9.0m ÷ (US$132m – US$30m) (Based on the trailing twelve months to December 2018.)

So, Live Ventures has an ROCE of 8.8%.

View our latest analysis for Live Ventures

Does Live Ventures Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Live Ventures’s ROCE appears to be around the 11% average of the Consumer Durables industry. Setting aside the industry comparison for now, Live Ventures’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Readers may find more attractive investment prospects elsewhere.

Live Ventures delivered an ROCE of 8.8%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving.

NasdaqCM:LIVE Past Revenue and Net Income, March 18th 2019

It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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 only a point-in-time measure. How cyclical is Live Ventures? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

How Live Ventures’s Current Liabilities Impact 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.

Live Ventures has total assets of US$132m and current liabilities of US$30m. Therefore its current liabilities are equivalent to approximately 23% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

Our Take On Live Ventures’s ROCE

If Live Ventures continues to earn an uninspiring ROCE, there may be better places to invest. But note: Live Ventures may not be the best stock to buy. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

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.