Has ACM Research, Inc. (NASDAQ:ACMR) Been Employing Capital Shrewdly?
Today we’ll evaluate ACM Research, Inc. (NASDAQ:ACMR) 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.
First, we’ll go over how we calculate ROCE. Second, we’ll look at its ROCE compared to similar companies. Last but not least, we’ll look at what impact its current liabilities have on its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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’.
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 ACM Research:
0.14 = US$700k ÷ (US$89m – US$35m) (Based on the trailing twelve months to September 2018.)
Therefore, ACM Research has an ROCE of 14%.
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Does ACM Research Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, ACM Research’s ROCE appears to be around the 14% average of the Semiconductor industry. Regardless of where ACM Research sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for ACM Research.
How ACM Research’s Current Liabilities Impact 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 counter this, investors can check if a company has high current liabilities relative to total assets.
ACM Research has total assets of US$89m and current liabilities of US$35m. Therefore its current liabilities are equivalent to approximately 39% of its total assets. ACM Research has a middling amount of current liabilities, increasing its ROCE somewhat.
What We Can Learn From ACM Research’s ROCE
ACM Research’s ROCE does look good, but the level of current liabilities also contribute to that. You might be able to find a better buy than ACM Research. 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).
I will like ACM Research better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
