Yahoo Finance Is There More To Prodigy Ventures Inc. (CVE:PGV) Than Its 11%Returns On Capital?
Today we’ll look at Prodigy Ventures Inc. (CVE:PGV) and reflect on its potential as an investment. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.
First up, we’ll look at what ROCE is and how we calculate it. Second, we’ll look at its ROCE compared to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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?
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 Prodigy Ventures:
0.11 = CA$542k ÷ (CA$5.1m – CA$2.4m) (Based on the trailing twelve months to September 2018.)
Therefore, Prodigy Ventures has an ROCE of 11%.
See our latest analysis for Prodigy Ventures
Does Prodigy Ventures Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. It appears that Prodigy Ventures’s ROCE is fairly close to the IT industry average of 11%. Regardless of where Prodigy Ventures sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
As we can see, Prodigy Ventures currently has an ROCE of 11%, less than the 64% it reported 3 years ago. This makes us wonder if the business is facing new challenges.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. 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, after all, simply a snap shot of a single year. How cyclical is Prodigy Ventures? You can see for yourself by looking at this free graph of past earnings, revenue and cash flow.
How Prodigy Ventures’s Current Liabilities Impact Its ROCE
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Prodigy Ventures has total assets of CA$5.1m and current liabilities of CA$2.4m. Therefore its current liabilities are equivalent to approximately 46% of its total assets. Prodigy Ventures has a medium level of current liabilities, which would boost the ROCE.
What We Can Learn From Prodigy Ventures’s ROCE
With a decent ROCE, the company could be interesting, but remember that the level of current liabilities make the ROCE look better. Of course you might be able to find a better stock than Prodigy Ventures. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
