Today we'll evaluate Entegris, Inc. (NASDAQ:ENTG) to determine whether it could have potential as an investment idea. Specifically, we'll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.
Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Finally, we'll look at how its current liabilities affect its ROCE.
What is Return On Capital Employed (ROCE)?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. 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 Entegris:
0.13 = US$301m ÷ (US$2.6b - US$202m) (Based on the trailing twelve months to March 2020.)
So, Entegris has an ROCE of 13%.
Is Entegris's ROCE Good?
One way to assess ROCE is to compare similar companies. In our analysis, Entegris's ROCE is meaningfully higher than the 8.4% average in the Semiconductor industry. I think that's good to see, since it implies the company is better than other companies at making the most of its capital. Separate from Entegris's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
You can see in the image below how Entegris'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. 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 Entegris.
Do Entegris's Current Liabilities Skew Its ROCE?
Liabilities, such as supplier bills and bank overdrafts, are referred to as current liabilities if they 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.
Entegris has current liabilities of US$202m and total assets of US$2.6b. Therefore its current liabilities are equivalent to approximately 7.8% of its total assets. With low current liabilities, Entegris's decent ROCE looks that much more respectable.
What We Can Learn From Entegris's ROCE
This is good to see, and while better prospects may exist, Entegris seems worth researching further. Entegris looks strong on this analysis, but there are plenty of other companies that could be a good opportunity . Here is a free list of companies growing earnings rapidly.
I will like Entegris better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.
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