Today we are going to look at Nova Wellness Group Berhad (KLSE:NOVA) 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.
Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. 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. All else being equal, a better business will have a higher ROCE. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.
So, How Do We Calculate ROCE?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Nova Wellness Group Berhad:
0.17 = RM14m ÷ (RM91m – RM6.8m) (Based on the trailing twelve months to September 2019.)
Therefore, Nova Wellness Group Berhad has an ROCE of 17%.
Does Nova Wellness Group Berhad Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Nova Wellness Group Berhad’s ROCE appears to be substantially greater than the 13% average in the Personal Products industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Nova Wellness Group Berhad’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, Nova Wellness Group Berhad currently has an ROCE of 17%, less than the 61% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can click on the image below to see (in greater detail) how Nova Wellness Group Berhad’s past growth compares to other companies.
When considering ROCE, bear in mind that it reflects the past and does not necessarily predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is only a point-in-time measure. How cyclical is Nova Wellness Group Berhad? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How Nova Wellness Group Berhad’s Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Nova Wellness Group Berhad has total liabilities of RM6.8m and total assets of RM91m. Therefore its current liabilities are equivalent to approximately 7.5% of its total assets. In addition to low current liabilities (making a negligible impact on ROCE), Nova Wellness Group Berhad earns a sound return on capital employed.
What We Can Learn From Nova Wellness Group Berhad’s ROCE
This is good to see, and while better prospects may exist, Nova Wellness Group Berhad seems worth researching further. Nova Wellness Group Berhad shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
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