This article is intended for those of you who are at the beginning of your investing journey and want to better understand how you can grow your money by investing in Reverse Corp Limited (ASX:REF).
Reverse stock represents an ownership share in the company. Owing to this, it is important that the underlying business is producing a sufficient amount of income from the capital invested by stockholders. You need to pay attention to this because your return on investment is linked to dividends and internal investments to improve the business, which can only occur if the company is expected to produce adequate earnings with the capital that has been provided. To understand Reverse’s capital returns we will look at a useful metric called return on capital employed. This will tell us if the company is growing your capital and placing you in good stead to sell your shares at a profit.
Reverse’s Return On Capital Employed
You only have a finite amount of capital to invest, so there are only so many companies that you can add to your portfolio. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if Reverse is good at growing investor capital. I have calculated Reverse’s ROCE for you below:
ROCE Calculation for REF
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = AU$280k ÷ (AU$9m – AU$936k) = 3.4%
As you can see, REF earned A$3.4 from every A$100 you invested over the previous twelve months. This shows Reverse provides an unsatisfying capital return that is well below the 15% ROCE that is typically considered to be a strong benchmark. Nevertheless, if REF is clever with their reinvestments or dividend payments, investors can still grow their capital although to a poor extent.
A deeper look
The underperforming ROCE is not ideal for Reverse investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, REF’s ROCE may increase, in which case your portfolio could benefit from holding the company. Because of this, it is important to look beyond the final value of REF’s ROCE and understand what is happening to the individual components. If you go back three years, you’ll find that REF’s ROCE has decreased from 32%. The movement in the earnings variable over this time shows a fall from AU$3m to AU$280k whilst the amount of capital employed also fell but by a proportionally lesser volume, which suggests the smaller ROCE is due to a decline in earnings relative to capital requirements.
ROCE for REF investors has fallen in the last few years and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. Before making any decisions, ROCE does not tell the whole picture so you need to pay attention to other fundamentals like future prospects and management ability. Reverse’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Future Outlook: What are well-informed industry analysts predicting for REF’s future growth? Take a look at our free research report of analyst consensus for REF’s outlook.
- Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for Reverse’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.