Are Wayside Technology Group, Inc.’s (NASDAQ:WSTG) High Returns Really That Great?

By
Simply Wall St
Published
November 06, 2019

Today we'll evaluate Wayside Technology Group, Inc. (NASDAQ:WSTG) to determine whether it could have potential as an investment idea. 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.

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

ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Generally speaking a higher ROCE is better. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

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 Wayside Technology Group:

0.17 = US$7.6m ÷ (US$106m - US$60m) (Based on the trailing twelve months to June 2019.)

So, Wayside Technology Group has an ROCE of 17%.

View our latest analysis for Wayside Technology Group

Does Wayside Technology Group Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, we find that Wayside Technology Group's ROCE is meaningfully better than the 12% average in the Electronic industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Wayside Technology Group's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

You can see in the image below how Wayside Technology Group's ROCE compares to its industry. Click to see more on past growth.

NasdaqGM:WSTG Past Revenue and Net Income, November 6th 2019

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Wayside Technology Group has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

Wayside Technology Group's Current Liabilities And Their Impact On 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.

Wayside Technology Group has total assets of US$106m and current liabilities of US$60m. As a result, its current liabilities are equal to approximately 57% of its total assets. This is admittedly a high level of current liabilities, improving ROCE substantially.

Our Take On Wayside Technology Group's ROCE

The ROCE would not look as appealing if the company had fewer current liabilities. There might be better investments than Wayside Technology Group 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 editorial-team@simplywallst.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.

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