The content of this article will benefit those of you who are starting to educate yourself about investing in the stock market and looking to gauge the potential return on investment in Evertz Technologies Limited (TSE:ET).
Evertz Technologies 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. This is because the actual cash flow generated by the business dictates the potential for income (dividends) and capital appreciation (price increases), which are the two ways to achieve positive returns when buying a stock. To understand Evertz Technologies’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.
ROCE: Explanation and Calculation
As an investor you have many alternative companies to choose from, which means there is an opportunity cost in any investment you make in the form of a foregone investment in another company. Accordingly, before you invest you need to assess the capital returns that the company has produced with reference to a certain benchmark to ensure that you are confident in the business' ability to grow your capital at a level that grants an investment over other companies. We'll look at Evertz Technologies’s returns by computing return on capital employed, which will tell us what the company can generate from the money spent in operations. ET’s ROCE is calculated below:
ROCE Calculation for ET
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets - Current Liabilities)
∴ ROCE = CA$70.47m ÷ (CA$421.12m - CA$89.32m) = 21.24%
The calculation above shows that ET’s earnings were 21.24% of capital employed. This makes Evertz Technologies attractively profitable when compared to a robust 15% ROCE yardstick. So if this rate continues in to the future and is able to either provide solid dividends or reinvestment opportunities, your capital will enlarge at a quick rate over time.
Before moving forward
ET is efficient with the use of capital, but this is only the case if ET continues to maintain the presently healthy ROCE, which will change if the company either earns less or requires more capital to create 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. Three years ago, ET’s ROCE was 24.67%, which means the company's capital returns have worsened. In this time, earnings have fallen from CA$89.42m to CA$70.47m and capital employed also decreased but to a smaller extent, which means the company's ROCE has deteriorated due to a decline in earnings relative to the capital invested in the business.
Despite ET's downward trend in ROCE in the recent past, the company still remains an attractive candidate that is capable of producing solid capital returns and a potentially strong 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. It's important to account for these factors because you cannot be sure if the downward path is a signal to run, or just a blip in an otherwise solid return profile. If you're interested in diving deeper, take a look at what I've linked below for further information on these fundamentals and other potential investment opportunities.
- Future Outlook: What are well-informed industry analysts predicting for ET’s future growth? Take a look at our free research report of analyst consensus for ET’s outlook.
- Valuation: What is ET worth today? Is the stock undervalued, even if its ROCE is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ET is currently mispriced 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 email@example.com.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.