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Are CommScope Holding Company, Inc.’s (NASDAQ:COMM) Returns Worth Your While?

Today we are going to look at CommScope Holding Company, Inc. (NASDAQ:COMM) to see whether it might be an attractive investment prospect. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we'll look at what ROCE is and how we calculate it. Then we'll compare its ROCE to similar companies. Then we'll determine how its current liabilities are affecting its ROCE.

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

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed 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?

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 CommScope Holding Company:

0.055 = US$525m ÷ (US$10b - US$905m) (Based on the trailing twelve months to March 2019.)

So, CommScope Holding Company has an ROCE of 5.5%.

See our latest analysis for CommScope Holding Company

Does CommScope Holding Company Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, CommScope Holding Company's ROCE appears to be around the 6.6% average of the Communications industry. Putting aside CommScope Holding Company's performance relative to its industry, its ROCE in absolute terms is poor - considering the risk of owning stocks compared to government bonds. There are potentially more appealing investments elsewhere.

The image below shows how CommScope Holding Company's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NasdaqGS:COMM Past Revenue and Net Income, August 6th 2019
NasdaqGS:COMM Past Revenue and Net Income, August 6th 2019

When considering this metric, keep in mind that it is backwards looking, and 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 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.

What Are Current Liabilities, And How Do They Affect CommScope Holding Company'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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

CommScope Holding Company has total assets of US$10b and current liabilities of US$905m. As a result, its current liabilities are equal to approximately 8.7% of its total assets. CommScope Holding Company has a low level of current liabilities, which have a negligible impact on its already low ROCE.

Our Take On CommScope Holding Company's ROCE

Nevertheless, there are potentially more attractive companies to invest in. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with modest (or no) debt, trading on a P/E below 20.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.

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