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A Close Look At Xilinx, Inc.’s (NASDAQ:XLNX) 22% ROCE

Simply Wall St

Today we are going to look at Xilinx, Inc. (NASDAQ:XLNX) to see whether it might be an attractive investment prospect. 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 of all, we'll work out how to 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.

Return On Capital Employed (ROCE): What is it?

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. In brief, it is a useful tool, but it is not without drawbacks. 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?

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 Xilinx:

0.22 = US$995m ÷ (US$5.0b - US$497m) (Based on the trailing twelve months to June 2019.)

Therefore, Xilinx has an ROCE of 22%.

See our latest analysis for Xilinx

Does Xilinx Have A Good ROCE?

One way to assess ROCE is to compare similar companies. Using our data, we find that Xilinx's ROCE is meaningfully better than the 10% average in the Semiconductor industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of the industry comparison, in absolute terms, Xilinx's ROCE currently appears to be excellent.

In our analysis, Xilinx's ROCE appears to be 22%, compared to 3 years ago, when its ROCE was 17%. This makes us wonder if the company is improving. You can click on the image below to see (in greater detail) how Xilinx's past growth compares to other companies.

NasdaqGS:XLNX Past Revenue and Net Income, September 1st 2019

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 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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Xilinx.

Do Xilinx's Current Liabilities Skew Its ROCE?

Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.

Xilinx has total liabilities of US$497m and total assets of US$5.0b. Therefore its current liabilities are equivalent to approximately 10% of its total assets. The fairly low level of current liabilities won't have much impact on the already great ROCE.

Our Take On Xilinx's ROCE

With low current liabilities and a high ROCE, Xilinx could be worthy of further investigation. There might be better investments than Xilinx out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.

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.