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Don’t Buy Integer Holdings Corporation (NYSE:ITGR) Until You Understand Its ROCE

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Simply Wall St
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Today we are going to look at Integer Holdings Corporation (NYSE:ITGR) to see whether it might be an attractive investment prospect. 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 of all, we'll work out how to calculate ROCE. Then we'll compare its ROCE to similar companies. 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 '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'.

How Do You Calculate Return On Capital Employed?

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 Integer Holdings:

0.087 = US$189m ÷ (US$2.4b - US$189m) (Based on the trailing twelve months to September 2019.)

So, Integer Holdings has an ROCE of 8.7%.

View our latest analysis for Integer Holdings

Is Integer Holdings's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Integer Holdings's ROCE appears to be around the 8.9% average of the Medical Equipment industry. Separate from how Integer Holdings stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

We can see that, Integer Holdings currently has an ROCE of 8.7% compared to its ROCE 3 years ago, which was 6.7%. This makes us wonder if the company is improving. The image below shows how Integer Holdings's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NYSE:ITGR Past Revenue and Net Income, January 13th 2020
NYSE:ITGR Past Revenue and Net Income, January 13th 2020

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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is, after all, simply a snap shot of a single year. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

Do Integer Holdings's Current Liabilities Skew Its ROCE?

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

Integer Holdings has total liabilities of US$189m and total assets of US$2.4b. As a result, its current liabilities are equal to approximately 8.0% of its total assets. Integer Holdings has a low level of current liabilities, which have a minimal impact on its uninspiring ROCE.

What We Can Learn From Integer Holdings's ROCE

Based on this information, Integer Holdings appears to be a mediocre business. You might be able to find a better investment than Integer Holdings. 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).

If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.

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.

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. Thank you for reading.