Vocus Group Limited (ASX:VOC): Why Return On Capital Employed Is Important

This article is intended for those of you who are at the beginning of your investing journey and want a simplistic look at the return on Vocus Group Limited (ASX:VOC) stock.

Vocus Group stock represents an ownership share in the company. As a result, your investment is being put to work to fund operations and if you want to earn an attractive return on your investment, the business needs to be making an adequate amount of money from the funds you provide. Your return is tied to VOC’s ability to do this because the amount earned is used to invest in opportunities to grow the business or payout dividends, which are the two sources of return on investment. Therefore, looking at how efficiently Vocus Group is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.

Vocus Group’s Return On Capital Employed

Choosing to invest in Vocus Group comes at the cost of investing in another potentially favourable company. The cost of missing out on another opportunity comes in the form of the potential long term gain you could’ve received, which is dependent on the gap between the return on capital you could’ve achieved and that of the company you invested in. Hence, capital returns are very important, and should be examined before you invest in conjunction with a certain benchmark that represents the minimum return you require to be compensated for the risk of missing out on other potentially lucrative investments. 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 Vocus Group is good at growing investor capital. Take a look at the formula box beneath:

ROCE Calculation for VOC

Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)

Capital Employed = (Total Assets – Current Liabilities)

∴ ROCE = AU\$90m ÷ (AU\$4.2b – AU\$439m) = 2.4%

VOC’s 2.4% ROCE means that for every A\$100 you invest, the company creates A\$2.4. Comparing this to a healthy 15% benchmark shows Vocus Group is currently unable to return a satisfactory amount to owners for the use of their capital, which isn’t good for investors who have forgone other potentially solid companies.

A deeper look

Although Vocus Group is in an unfavourable position, you should know that this could change if the company is able to increase earnings on the same capital base or find new efficiencies that require less capital to produce earnings. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. Looking three years in the past, it is evident that VOC’s ROCE has deteriorated from 7.3%, indicating the company’s capital returns have declined. Conversely, the movement in the earnings variable shows a jump from AU\$26m to AU\$90m albeit capital employed rose by a relatively larger volume in response to an increase in total assets , which means that although earnings have increased, VOC requires more capital to produce each A\$1 of earnings.

Next Steps

ROCE for VOC 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 valuation. If you’re building your portfolio and want to take a deeper look, I’ve added a few links below that will help you further evaluate VOC or move on to other alternatives.

1. Future Outlook: What are well-informed industry analysts predicting for VOC’s future growth? Take a look at our free research report of analyst consensus for VOC’s outlook.
2. Valuation: What is VOC worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether VOC is currently undervalued by the market.
3. 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 editorial-team@simplywallst.com.