Today we are going to look at Commercial Vehicle Group, Inc. (NASDAQ:CVGI) to see whether it might be an attractive investment prospect. 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 up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. Finally, we’ll look at how its current liabilities affect 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. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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’.
How Do You Calculate Return On Capital Employed?
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 Commercial Vehicle Group:
0.23 = US$71m ÷ (US$454m – US$140m) (Based on the trailing twelve months to March 2019.)
Therefore, Commercial Vehicle Group has an ROCE of 23%.
Does Commercial Vehicle Group Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Commercial Vehicle Group’s ROCE appears to be substantially greater than the 11% average in the Machinery industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Setting aside the comparison to its industry for a moment, Commercial Vehicle Group’s ROCE in absolute terms currently looks quite high.
We can see that , Commercial Vehicle Group currently has an ROCE of 23% compared to its ROCE 3 years ago, which was 12%. This makes us think about whether the company has been reinvesting shrewdly.
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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Commercial Vehicle Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
How Commercial Vehicle Group’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.
Commercial Vehicle Group has total liabilities of US$140m and total assets of US$454m. As a result, its current liabilities are equal to approximately 31% of its total assets. A medium level of current liabilities boosts Commercial Vehicle Group’s ROCE somewhat.
Our Take On Commercial Vehicle Group’s ROCE
Even so, it has a great ROCE, and could be an attractive prospect for further research. Commercial Vehicle Group looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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If you spot an error that warrants correction, please contact the editor at email@example.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.