Yahoo Finance Should OVS S.p.A.’s (BIT:OVS) Weak Investment Returns Worry You?
Today we'll evaluate OVS S.p.A. (BIT:OVS) to determine whether it could have potential as an investment idea. To be precise, we'll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
Firstly, we'll go over how we calculate ROCE. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. 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.
So, How Do We Calculate ROCE?
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 OVS:
0.04 = €72m ÷ (€2.9b - €1.1b) (Based on the trailing twelve months to July 2019.)
So, OVS has an ROCE of 4.0%.
Check out our latest analysis for OVS
Does OVS Have A Good ROCE?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, OVS's ROCE appears to be significantly below the 10% average in the Luxury industry. This performance could be negative if sustained, as it suggests the business may underperform its industry. Regardless of how OVS stacks up against its industry, its ROCE in absolute terms is quite low (especially compared to a bank account). It is likely that there are more attractive prospects out there.
OVS's current ROCE of 4.0% is lower than its ROCE in the past, which was 8.1%, 3 years ago. Therefore we wonder if the company is facing new headwinds. You can click on the image below to see (in greater detail) how OVS's past growth compares to other companies.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.
Do OVS's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
OVS has total liabilities of €1.1b and total assets of €2.9b. As a result, its current liabilities are equal to approximately 37% of its total assets. With a medium level of current liabilities boosting the ROCE a little, OVS's low ROCE is unappealing.
Our Take On OVS's ROCE
This company may not be the most attractive investment prospect. Of course, you might also be able to find a better stock than OVS. So you may wish to see this free collection of other companies that have grown earnings strongly.
There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.
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.
