In This Article:
Today we'll evaluate VibroPower Corporation Limited (SGX:BJD) to determine whether it could have potential as an investment idea. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First, 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 metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. 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'.
So, How Do We Calculate ROCE?
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 VibroPower:
0.044 = S$949k ÷ (S$34m - S$12m) (Based on the trailing twelve months to June 2019.)
Therefore, VibroPower has an ROCE of 4.4%.
Check out our latest analysis for VibroPower
Is VibroPower's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. We can see VibroPower's ROCE is meaningfully below the Electrical industry average of 7.9%. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how VibroPower compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.3% available in government bonds. It is likely that there are more attractive prospects out there.
VibroPower delivered an ROCE of 4.4%, which is better than 3 years ago, as was making losses back then. That implies the business has been improving. The image below shows how VibroPower's ROCE compares to its industry, and you can click it to see more detail on its past growth.
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, after all, simply a snap shot of a single year. How cyclical is VibroPower? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.