Today we'll look at Nordic Semiconductor ASA (OB:NOD) and reflect on its potential as an investment. 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. 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 amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. 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 Nordic Semiconductor:
0.053 = US$13m ÷ (US$348m - US$97m) (Based on the trailing twelve months to March 2020.)
Therefore, Nordic Semiconductor has an ROCE of 5.3%.
Is Nordic Semiconductor's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, Nordic Semiconductor's ROCE appears to be significantly below the 9.9% average in the Semiconductor industry. This performance is not ideal, as it suggests the company may not be deploying its capital as effectively as some competitors. Setting aside the industry comparison for now, Nordic Semiconductor's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
Nordic Semiconductor's current ROCE of 5.3% is lower than 3 years ago, when the company reported a 7.3% ROCE. This makes us wonder if the business is facing new challenges. The image below shows how Nordic Semiconductor's ROCE compares to its industry, and you can click it to see more detail on its past growth.
Remember that this metric is backwards looking - it shows what has happened in the past, and does not accurately predict the future. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during busts. 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 Nordic Semiconductor.
How Nordic Semiconductor's Current Liabilities Impact Its 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.
Nordic Semiconductor has total assets of US$348m and current liabilities of US$97m. As a result, its current liabilities are equal to approximately 28% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.
The Bottom Line On Nordic Semiconductor's ROCE
With that in mind, we're not overly impressed with Nordic Semiconductor's ROCE, so it may not be the most appealing prospect. Of course, you might also be able to find a better stock than Nordic Semiconductor. So you may wish to see this free collection of other companies that have grown earnings strongly.
Nordic Semiconductor is not the only stock insiders are buying. So take a peek at this free list of growing companies with insider buying.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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