Yahoo Finance Why We Like Verso Corporation’s (NYSE:VRS) 14% Return On Capital Employed
Today we'll look at Verso Corporation (NYSE:VRS) and reflect on its potential as an investment. In particular, we'll consider its Return On Capital Employed (ROCE), as that can give us insight into how profitably the company is able to employ capital in its 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.
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. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. 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'.
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 Verso:
0.14 = US$182m ÷ (US$1.7b - US$319m) (Based on the trailing twelve months to June 2019.)
So, Verso has an ROCE of 14%.
Check out our latest analysis for Verso
Is Verso's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Verso's ROCE appears to be substantially greater than the 10% average in the Forestry industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Independently of how Verso compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Verso delivered an ROCE of 14%, which is better than 3 years ago, as was making losses back then. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Verso's past growth compares to other companies.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. Since the future is so important for investors, you should check out our free report on analyst forecasts for Verso.
How Verso's Current Liabilities Impact Its ROCE
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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.
Verso has total assets of US$1.7b and current liabilities of US$319m. Therefore its current liabilities are equivalent to approximately 19% of its total assets. Current liabilities are minimal, limiting the impact on ROCE.
Our Take On Verso's ROCE
Overall, Verso has a decent ROCE and could be worthy of further research. Verso looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
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.
