Yahoo Finance Here’s What Vista Group International Limited’s (NZSE:VGL) Return On Capital Can Tell Us
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Today we are going to look at Vista Group International Limited (NZSE:VGL) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we'll look at what ROCE is and how we calculate it. Next, we'll compare it to others in its industry. 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. Generally speaking a higher ROCE is better. In brief, it is a useful tool, but it is not without drawbacks. 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?
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 Vista Group International:
0.14 = NZ$24m ÷ (NZ$221m - NZ$44m) (Based on the trailing twelve months to December 2018.)
Therefore, Vista Group International has an ROCE of 14%.
Check out our latest analysis for Vista Group International
Is Vista Group International's ROCE Good?
One way to assess ROCE is to compare similar companies. We can see Vista Group International's ROCE is around the 15% average reported by the Software industry. Regardless of where Vista Group International sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
You can see in the image below how Vista Group International's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Vista Group International.
What Are Current Liabilities, And How Do They Affect Vista Group International's ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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.
Vista Group International has total liabilities of NZ$44m and total assets of NZ$221m. As a result, its current liabilities are equal to approximately 20% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On Vista Group International's ROCE
This is good to see, and with a sound ROCE, Vista Group International could be worth a closer look. There might be better investments than Vista Group International out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
I will like Vista Group International 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.
