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Should Wi2Wi Corporation’s (CVE:YTY) Weak Investment Returns Worry You?

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Today we'll evaluate Wi2Wi Corporation (CVE:YTY) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we'll go over how we calculate ROCE. 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 measures the 'return' (pre-tax profit) a company generates from capital employed in its business. All else being equal, a better business will have a higher ROCE. Overall, it is a valuable metric that has its flaws. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'

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 Wi2Wi:

0.023 = US$153k ÷ (US$9.0m - US$2.5m) (Based on the trailing twelve months to March 2019.)

So, Wi2Wi has an ROCE of 2.3%.

Check out our latest analysis for Wi2Wi

Is Wi2Wi's ROCE Good?

One way to assess ROCE is to compare similar companies. Using our data, Wi2Wi's ROCE appears to be significantly below the 5.6% average in the Communications industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Putting aside Wi2Wi'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.

Wi2Wi delivered an ROCE of 2.3%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. The image below shows how Wi2Wi's ROCE compares to its industry, and you can click it to see more detail on its past growth.

TSXV:YTY Past Revenue and Net Income, August 6th 2019
TSXV:YTY Past Revenue and Net Income, August 6th 2019

Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. 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 Wi2Wi's Current Liabilities Skew Its ROCE?

Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Wi2Wi has total liabilities of US$2.5m and total assets of US$9.0m. As a result, its current liabilities are equal to approximately 28% of its total assets. With a very reasonable level of current liabilities, so the impact on ROCE is fairly minimal.

Our Take On Wi2Wi's ROCE

Wi2Wi has a poor ROCE, and there may be better investment prospects out there. You might be able to find a better investment than Wi2Wi. 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).

I will like Wi2Wi better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.