How Do Vince Holding Corp.’s (NYSE:VNCE) Returns On Capital Compare To Peers?

Today we’ll look at Vince Holding Corp. (NYSE:VNCE) and reflect on its potential as an investment. In particular, we’ll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its business.

First, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. 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 Vince Holding:

0.0029 = -US$12.2m ÷ (US$251m – US$46m) (Based on the trailing twelve months to November 2018.)

So, Vince Holding has an ROCE of 0.3%.

View our latest analysis for Vince Holding

Does Vince Holding Have A Good ROCE?

One way to assess ROCE is to compare similar companies. We can see Vince Holding’s ROCE is meaningfully below the Luxury industry average of 14%. This performance could be negative if sustained, as it suggests the business may underperform its industry. Independently of how Vince Holding compares to its industry, its ROCE in absolute terms is low; not much better than the ~2.9% available in government bonds. Readers may wish to look for more rewarding investments.

Vince Holding’s current ROCE of 0.3% is lower than 3 years ago, when the company reported a 11% ROCE. So investors might consider if it has had issues recently.

NYSE:VNCE Last Perf December 19th 18
NYSE:VNCE Last Perf December 19th 18

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. 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 Vince Holding has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Vince Holding’s ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. Due to the way the ROCE equation works, having large bills due in the near term can make it look as though a company has less capital employed, and thus a higher ROCE than usual. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Vince Holding has total liabilities of US$46m and total assets of US$251m. As a result, its current liabilities are equal to approximately 18% of its total assets. This is not a high level of current liabilities, which would not boost the ROCE by much.

Our Take On Vince Holding’s ROCE

That’s not a bad thing, however Vince Holding has a weak ROCE and may not be an attractive investment. Of course you might be able to find a better stock than Vince Holding. So you may wish to see this free collection of other companies that have grown earnings strongly.

If you would prefer check out another company — one with potentially superior financials — then do not miss this free list of interesting companies, that have HIGH return on equity and low debt.

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.