Today we'll look at Atrion Corporation (NASDAQ:ATRI) 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. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Understanding Return On Capital Employed (ROCE)
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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.
How Do You Calculate Return On Capital Employed?
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 Atrion:
0.17 = US$41m ÷ (US$257m - US$11m) (Based on the trailing twelve months to September 2019.)
So, Atrion has an ROCE of 17%.
Is Atrion's ROCE Good?
ROCE is commonly used for comparing the performance of similar businesses. Atrion's ROCE appears to be substantially greater than the 8.9% average in the Medical Equipment industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Separate from Atrion's performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.
We can see that, Atrion currently has an ROCE of 17%, less than the 23% it reported 3 years ago. So investors might consider if it has had issues recently. You can see in the image below how Atrion'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 misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. ROCE is only a point-in-time measure. You can check if Atrion has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Atrion's Current Liabilities Skew Its ROCE?
Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills 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 counteract this, we check if a company has high current liabilities, relative to its total assets.
Atrion has total assets of US$257m and current liabilities of US$11m. Therefore its current liabilities are equivalent to approximately 4.4% of its total assets. With low current liabilities, Atrion's decent ROCE looks that much more respectable.
What We Can Learn From Atrion's ROCE
If Atrion can continue reinvesting in its business, it could be an attractive prospect. Atrion 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.
Atrion 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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