Today we'll evaluate BE Semiconductor Industries N.V. (AMS:BESI) 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, we'll go over how we calculate ROCE. Next, we'll compare it to others in its industry. And finally, we'll look at how its current liabilities are impacting its ROCE.
Return On Capital Employed (ROCE): What is it?
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. 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 BE Semiconductor Industries:
0.19 = €106m ÷ (€654m - €83m) (Based on the trailing twelve months to June 2019.)
So, BE Semiconductor Industries has an ROCE of 19%.
Is BE Semiconductor Industries's ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, BE Semiconductor Industries's ROCE is meaningfully higher than the 9.6% average in the Semiconductor industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Putting aside its position relative to its industry for now, in absolute terms, BE Semiconductor Industries's ROCE is currently very good.
In our analysis, BE Semiconductor Industries's ROCE appears to be 19%, compared to 3 years ago, when its ROCE was 15%. This makes us wonder if the company is improving. You can see in the image below how BE Semiconductor Industries's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for BE Semiconductor Industries.
What Are Current Liabilities, And How Do They Affect BE Semiconductor Industries's ROCE?
Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, 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.
BE Semiconductor Industries has total liabilities of €83m and total assets of €654m. As a result, its current liabilities are equal to approximately 13% of its total assets. This is quite a low level of current liabilities which would not greatly boost the already high ROCE.
What We Can Learn From BE Semiconductor Industries's ROCE
With low current liabilities and a high ROCE, BE Semiconductor Industries could be worthy of further investigation. BE Semiconductor Industries shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.
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If you spot an error that warrants correction, please contact the editor at email@example.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.