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Why We’re Not Keen On NV5 Global, Inc.’s (NASDAQ:NVEE) 4.2% Return On Capital

Simply Wall St

Today we'll look at NV5 Global, Inc. (NASDAQ:NVEE) and reflect on its potential as an investment. 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.

Firstly, 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.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. 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'.

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 NV5 Global:

0.042 = US$32m ÷ (US$893m - US$114m) (Based on the trailing twelve months to December 2019.)

Therefore, NV5 Global has an ROCE of 4.2%.

View our latest analysis for NV5 Global

Does NV5 Global Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. We can see NV5 Global's ROCE is meaningfully below the Construction industry average of 11%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside NV5 Global's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.

NV5 Global's current ROCE of 4.2% is lower than its ROCE in the past, which was 11%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can see in the image below how NV5 Global's ROCE compares to its industry. Click to see more on past growth.

NasdaqCM:NVEE Past Revenue and Net Income, March 20th 2020
NasdaqCM:NVEE Past Revenue and Net Income, March 20th 2020

When considering this metric, keep in mind that it is backwards looking, and 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do NV5 Global's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.

NV5 Global has total assets of US$893m and current liabilities of US$114m. As a result, its current liabilities are equal to approximately 13% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

The Bottom Line On NV5 Global's ROCE

While that is good to see, NV5 Global has a low ROCE and does not look attractive in this analysis. Of course, you might also be able to find a better stock than NV5 Global. So you may wish to see this free collection of other companies that have grown earnings strongly.

I will like NV5 Global better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.

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. Thank you for reading.