Today we are going to look at Vistar Holdings Limited (HKG:8535) to see whether it might be an attractive investment prospect. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
First up, we'll look at what ROCE is and how we calculate it. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
Return On Capital Employed (ROCE): What is it?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that 'one dollar invested in the company generates value of more than one dollar'.
How Do You Calculate Return On Capital Employed?
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 Vistar Holdings:
0.21 = HK$23m ÷ (HK$190m - HK$82m) (Based on the trailing twelve months to June 2019.)
Therefore, Vistar Holdings has an ROCE of 21%.
Is Vistar Holdings's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Vistar Holdings's ROCE is meaningfully better than the 12% average in the Construction industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Putting aside its position relative to its industry for now, in absolute terms, Vistar Holdings's ROCE is currently very good.
Vistar Holdings's current ROCE of 21% is lower than 3 years ago, when the company reported a 44% ROCE. Therefore we wonder if the company is facing new headwinds. Take a look at the image below to see how Vistar Holdings's past growth compares to the average in its industry.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. ROCE is only a point-in-time measure. You can check if Vistar Holdings has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Vistar Holdings's Current Liabilities And Their Impact On Its ROCE
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Vistar Holdings has total assets of HK$190m and current liabilities of HK$82m. As a result, its current liabilities are equal to approximately 43% of its total assets. Vistar Holdings has a medium level of current liabilities, boosting its ROCE somewhat.
What We Can Learn From Vistar Holdings's ROCE
Still, it has a high ROCE, and may be an interesting prospect for further research. There might be better investments than Vistar Holdings out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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 email@example.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.