Today we are going to look at Skyworks Solutions, Inc. (NASDAQ:SWKS) to see whether it might be an attractive investment prospect. 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.
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 is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. 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?
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 Skyworks Solutions:
0.27 = US$1.2b ÷ (US$4.8b - US$338m) (Based on the trailing twelve months to March 2019.)
So, Skyworks Solutions has an ROCE of 27%.
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Does Skyworks Solutions Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Skyworks Solutions's ROCE appears to be substantially greater than the 11% 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. Putting aside its position relative to its industry for now, in absolute terms, Skyworks Solutions's ROCE is currently very good.
When considering ROCE, bear in mind that it reflects the past and does not necessarily 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. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Skyworks Solutions.
Do Skyworks Solutions'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.
Skyworks Solutions has total liabilities of US$338m and total assets of US$4.8b. Therefore its current liabilities are equivalent to approximately 7.1% of its total assets. Minimal current liabilities are not distorting Skyworks Solutions's impressive ROCE.
The Bottom Line On Skyworks Solutions's ROCE
This suggests the company would be worth researching in more depth. There might be better investments than Skyworks Solutions out there, but you will have to work hard to find them . These promising businesses with rapidly growing earnings might be right up your alley.
I will like Skyworks Solutions 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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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. Thank you for reading.