How Good Is Vogiatzoglou Systems S.A. (ATH:VOSYS) At Creating Shareholder Value?

July 25, 2019

Today we'll evaluate Vogiatzoglou Systems S.A. (ATH:VOSYS) to determine whether it could have potential as an investment idea. 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.

Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is 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. 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 Vogiatzoglou Systems:

0.10 = €1.7m ÷ (€22m - €5.3m) (Based on the trailing twelve months to December 2018.)

Therefore, Vogiatzoglou Systems has an ROCE of 10.0%.

View our latest analysis for Vogiatzoglou Systems

Is Vogiatzoglou Systems's ROCE Good?

ROCE is commonly used for comparing the performance of similar businesses. It appears that Vogiatzoglou Systems's ROCE is fairly close to the Trade Distributors industry average of 11%. Setting aside the industry comparison for now, Vogiatzoglou Systems'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.

In our analysis, Vogiatzoglou Systems's ROCE appears to be 10.0%, compared to 3 years ago, when its ROCE was 0.8%. This makes us think about whether the company has been reinvesting shrewdly.

ATSE:VOSYS Past Revenue and Net Income, July 26th 2019

It is important to remember that ROCE shows past performance, and is 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. How cyclical is Vogiatzoglou Systems? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.

Do Vogiatzoglou Systems'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.

Vogiatzoglou Systems has total liabilities of €5.3m and total assets of €22m. Therefore its current liabilities are equivalent to approximately 24% of its total assets. It is good to see a restrained amount of current liabilities, as this limits the effect on ROCE.

What We Can Learn From Vogiatzoglou Systems's ROCE

With that in mind, we're not overly impressed with Vogiatzoglou Systems's ROCE, so it may not be the most appealing prospect. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.