Yahoo Finance Is Chicago Rivet & Machine Co. (NYSEMKT:CVR) Struggling With Its 4.1% Return On Capital Employed?
Today we are going to look at Chicago Rivet & Machine Co. (NYSEMKT:CVR) 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.
First, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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'.
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 Chicago Rivet & Machine:
0.041 = US$1.3m ÷ (US$33m - US$2.4m) (Based on the trailing twelve months to September 2019.)
So, Chicago Rivet & Machine has an ROCE of 4.1%.
Check out our latest analysis for Chicago Rivet & Machine
Is Chicago Rivet & Machine's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. We can see Chicago Rivet & Machine's ROCE is meaningfully below the Machinery industry average of 11%. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Putting aside Chicago Rivet & Machine's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. It is likely that there are more attractive prospects out there.
We can see that, Chicago Rivet & Machine currently has an ROCE of 4.1%, less than the 11% it reported 3 years ago. This makes us wonder if the business is facing new challenges. You can see in the image below how Chicago Rivet & Machine's ROCE compares to its industry. Click to see more on past growth.
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. ROCE is, after all, simply a snap shot of a single year. You can check if Chicago Rivet & Machine 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 Chicago Rivet & Machine's ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.
Chicago Rivet & Machine has total assets of US$33m and current liabilities of US$2.4m. As a result, its current liabilities are equal to approximately 7.1% of its total assets. Chicago Rivet & Machine has very few current liabilities, which have a minimal effect on its already low ROCE.
The Bottom Line On Chicago Rivet & Machine's ROCE
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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.
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. Thank you for reading.
