Yahoo Finance Nova LifeStyle, Inc. (NASDAQ:NVFY) Might Not Be A Great Investment
Today we are going to look at Nova LifeStyle, Inc. (NASDAQ:NVFY) to see whether it might be an attractive investment prospect. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of 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. Then we'll determine how its current liabilities are affecting 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. 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 Nova LifeStyle:
0.016 = US$1.2m ÷ (US$81m - US$1.2m) (Based on the trailing twelve months to June 2019.)
Therefore, Nova LifeStyle has an ROCE of 1.6%.
View our latest analysis for Nova LifeStyle
Is Nova LifeStyle's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. Using our data, Nova LifeStyle's ROCE appears to be significantly below the 12% average in the Consumer Durables industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Independently of how Nova LifeStyle compares to its industry, its ROCE in absolute terms is low; especially compared to the ~2.7% available in government bonds. Readers may wish to look for more rewarding investments.
Nova LifeStyle's current ROCE of 1.6% is lower than its ROCE in the past, which was 2.2%, 3 years ago. So investors might consider if it has had issues recently. You can click on the image below to see (in greater detail) how Nova LifeStyle's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Nova LifeStyle 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 Nova LifeStyle's ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Nova LifeStyle has total assets of US$81m and current liabilities of US$1.2m. Therefore its current liabilities are equivalent to approximately 1.5% of its total assets. Nova LifeStyle has very few current liabilities, which have a minimal effect on its already low ROCE.
Our Take On Nova LifeStyle's ROCE
Nonetheless, there may be better places to invest your capital. You might be able to find a better investment than Nova LifeStyle. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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.
