Today we'll look at AS VEF Radiotehnika RRR (MUN:VPN) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.
First, we'll go over how we calculate ROCE. 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 measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 AS VEF Radiotehnika RRR:
0.053 = €33k ÷ (€783k - €153k) (Based on the trailing twelve months to September 2019.)
Therefore, AS VEF Radiotehnika RRR has an ROCE of 5.3%.
Is AS VEF Radiotehnika RRR's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. In this analysis, AS VEF Radiotehnika RRR's ROCE appears meaningfully below the 8.2% average reported by the Consumer Durables industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Aside from the industry comparison, AS VEF Radiotehnika RRR's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
AS VEF Radiotehnika RRR delivered an ROCE of 5.3%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability. You can click on the image below to see (in greater detail) how AS VEF Radiotehnika RRR's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and 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. If AS VEF Radiotehnika RRR is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How AS VEF Radiotehnika RRR'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 counter this, investors can check if a company has high current liabilities relative to total assets.
AS VEF Radiotehnika RRR has total liabilities of €153k and total assets of €783k. Therefore its current liabilities are equivalent to approximately 20% 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 AS VEF Radiotehnika RRR's ROCE
That said, AS VEF Radiotehnika RRR's ROCE is mediocre, there may be more attractive investments around. You might be able to find a better investment than AS VEF Radiotehnika RRR. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
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