Today we'll evaluate BioLife Solutions, Inc. (NASDAQ:BLFS) to determine whether it could have potential as an investment idea. 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. Then we'll compare its ROCE 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 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. 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 BioLife Solutions:
0.082 = US$4.0m ÷ (US$52m - US$3.1m) (Based on the trailing twelve months to June 2019.)
So, BioLife Solutions has an ROCE of 8.2%.
Is BioLife Solutions's ROCE Good?
When making comparisons between similar businesses, investors may find ROCE useful. Using our data, BioLife Solutions's ROCE appears to be around the 9.4% average of the Medical Equipment industry. Aside from the industry comparison, BioLife Solutions's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. It is possible that there are more rewarding investments out there.
BioLife Solutions delivered an ROCE of 8.2%, which is better than 3 years ago, as was making losses back then. That suggests the business has returned to profitability. You can click on the image below to see (in greater detail) how BioLife Solutions's past growth compares to other companies.
When considering this metric, keep in mind that it is backwards looking, and 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for BioLife Solutions.
What Are Current Liabilities, And How Do They Affect BioLife Solutions's ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. 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 check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
BioLife Solutions has total liabilities of US$3.1m and total assets of US$52m. Therefore its current liabilities are equivalent to approximately 6.0% of its total assets. BioLife Solutions reports few current liabilities, which have a negligible impact on its unremarkable ROCE.
The Bottom Line On BioLife Solutions's ROCE
BioLife Solutions looks like an ok business, but on this analysis it is not at the top of our buy list. Of course, you might also be able to find a better stock than BioLife Solutions. 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 firstname.lastname@example.org. 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.