This article is intended for those of you who are at the beginning of your investing journey and looking to gauge the potential return on investment in Stingray Digital Group Inc (TSE:RAY.A).
Buying Stingray Digital Group makes you a partial owner of 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 RAY.A’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. To understand Stingray Digital Group’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.
Calculating Return On Capital Employed for RAY.A
When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. 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. We'll look at Stingray Digital Group’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. Take a look at the formula box beneath:
ROCE Calculation for RAY.A
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets - Current Liabilities)
∴ ROCE = CA$7.42m ÷ (CA$243.71m - CA$55.44m) = 3.94%
As you can see, RAY.A earned CA$3.9 from every CA$100 you invested over the previous twelve months. This makes Stingray Digital Group disappointing when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future, investor capital may be able to compound over time, but not to standard that investors should be aiming for.
Why is this the case?
Stingray Digital Group's relatively poor ROCE is tied to the movement in two factors that change over time: earnings and capital requirements. At the moment Stingray Digital Group is in an adverse position, but this can change if these factors improve. So it is important for investors to understand what is going on under the hood and look at how these variables have been behaving. If you go back three years, you'll find that RAY.A’s ROCE has decreased from 7.97%. We can see that earnings have actually increased from CA$4.89m to CA$7.42m but capital employed has increased by a relatively larger volume as a result of a hike in the level of total assets and decrease in current liabilities (less borrowed money) , indicating that the previous growth in earnings has not been able to improve ROCE because the company now needs to employ more capital to operate the business.
Stingray Digital Group’s ROCE has decreased in the recent past and is currently at a level that makes us question whether the company is capable of providing a suitable return on investment. However, it is important to know that ROCE does not dictate returns alone, so you need to consider other fundamentals in the business such as 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 RAY.A or move on to other alternatives.
- Future Outlook: What are well-informed industry analysts predicting for RAY.A’s future growth? Take a look at our free research report of analyst consensus for RAY.A’s outlook.
- Valuation: What is RAY.A 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 RAY.A is currently undervalued by the market.
- 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 firstname.lastname@example.org.