Yahoo Finance Here's What Norvista Capital Corporation's (CVE:NVV) ROCE Can Tell Us
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Today we'll evaluate Norvista Capital Corporation (CVE:NVV) 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.
Firstly, we'll go over how we 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.
Understanding 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. In general, businesses with a higher ROCE are usually better quality. 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 Norvista Capital:
0.18 = CA$2.7m ÷ (CA$16m - CA$668k) (Based on the trailing twelve months to March 2019.)
Therefore, Norvista Capital has an ROCE of 18%.
See our latest analysis for Norvista Capital
Is Norvista Capital's ROCE Good?
One way to assess ROCE is to compare similar companies. Norvista Capital's ROCE appears to be substantially greater than the 3.0% average in the Metals and Mining industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of where Norvista Capital sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
Our data shows that Norvista Capital currently has an ROCE of 18%, compared to its ROCE of 5.7% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. You can see in the image below how Norvista Capital's ROCE compares to its industry. Click to see more on past growth.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. Remember that most companies like Norvista Capital are cyclical businesses. If Norvista Capital is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.
How Norvista Capital's Current Liabilities Impact 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.
Norvista Capital has total assets of CA$16m and current liabilities of CA$668k. Therefore its current liabilities are equivalent to approximately 4.3% of its total assets. In addition to low current liabilities (making a negligible impact on ROCE), Norvista Capital earns a sound return on capital employed.
The Bottom Line On Norvista Capital's ROCE
If Norvista Capital can continue reinvesting in its business, it could be an attractive prospect. There might be better investments than Norvista Capital 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.
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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.
