I am writing today to help inform people who are new to the stock market and want to begin learning the link between VEON Ltd (NASDAQ:VEON)’s return fundamentals and stock market performance.
Purchasing VEON gives you an ownership stake in the company. This share represents a portion of capital used by the company to operate the business, and it is important the company is able to use the capital base efficiently to create adequate cash flows for you as an investor. 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. Therefore, looking at how efficiently VEON is able to use capital to create earnings will help us understand your potential return. Investors use many different metrics but the analysis below focuses on return on capital employed (ROCE). Let’s take a look at what it can tell us.
Calculating Return On Capital Employed for VEON
When you choose to invest in a company, there is an opportunity cost because that money could’ve been invested elsewhere. Therefore all else aside, your investment in a certain company represents a vote of confidence that the money used to buy the stock will grow larger than if invested elsewhere. So the business’ ability to grow the size of your capital is very important and can be assessed by comparing the return on capital you can get on your investment with a hurdle rate that depends on the other return possibilities you can identify. A good metric to use is return on capital employed (ROCE), which helps us gauge how much income can be created from the funds needed to operate the business. This metric will tell us if VEON is good at growing investor capital. I have calculated VEON’s ROCE for you below:
ROCE Calculation for VEON
Return on Capital Employed (ROCE) = Earnings Before Tax (EBT) ÷ (Capital Employed)
Capital Employed = (Total Assets – Current Liabilities)
∴ ROCE = US$172m ÷ (US$16b – US$4.8b) = 14%
The calculation above shows that VEON’s earnings were 14% of capital employed. Comparing this to a healthy 15% benchmark shows VEON is currently unable to return a desired amount to owners for the use of their capital, which isn’t favourable for investors who have forgone other potentially solid companies.
What is causing this?
The underperforming ROCE is not ideal for VEON investors if the company is unable to turn things around. But if the underlying variables (earnings and capital employed) improve, VEON’s ROCE may increase, in which case your portfolio could benefit from holding the company. Therefore, investors need to understand the trend of the inputs in the formula above, so that they can see if there is an opportunity to invest. If you go back three years, you’ll find that VEON’s ROCE has increased from 8.1%. The movement in the earnings variable over this time shows a fall from US$1.5b to US$172m, but the use of capital has fallen further due to a fall in total assets employed , which suggests investor’s ROCE has risen because the company requires less capital to create earnings despite the previous decline in EBT.
Although VEON’s ROCE is currently below the acceptable benchmark, the company has triggered an upward trend over the recent past which could signal an opportunity for a solid return on investment in the long term. 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 to determine whether there is potential for return by focusing our attention elsewhere. VEON’s fundamentals can be explored with the links I’ve provided below if you are interested, otherwise you can start looking at other high-performing stocks.
- Future Outlook: What are well-informed industry analysts predicting for VEON’s future growth? Take a look at our free research report of analyst consensus for VEON’s outlook.
- Valuation: What is VEON worth today? Despite the unattractive ROCE, is the outlook correctly factored in to the price? The intrinsic value infographic in our free research report helps visualize whether VEON is currently undervalued 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 firstname.lastname@example.org.