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Here's What Xilinx, Inc.'s (NASDAQ:XLNX) ROCE Can Tell Us

Simply Wall St
·4 mins read

Today we are going to look at Xilinx, Inc. (NASDAQ:XLNX) to see whether it might be an attractive investment prospect. 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. And finally, we'll look at how its current liabilities are impacting its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. 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 Xilinx:

0.20 = US$872m ÷ (US$5.0b - US$516m) (Based on the trailing twelve months to December 2019.)

Therefore, Xilinx has an ROCE of 20%.

Check out our latest analysis for Xilinx

Is Xilinx's ROCE Good?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, we find that Xilinx's ROCE is meaningfully better than the 8.9% 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. Independently of how Xilinx compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

The image below shows how Xilinx's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NasdaqGS:XLNX Past Revenue and Net Income April 10th 2020
NasdaqGS:XLNX Past Revenue and Net Income April 10th 2020

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. What happens in the future is pretty important for investors, so we have prepared a free report on analyst forecasts for Xilinx.

Do Xilinx'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. 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 counter this, investors can check if a company has high current liabilities relative to total assets.

Xilinx has total assets of US$5.0b and current liabilities of US$516m. Therefore its current liabilities are equivalent to approximately 10% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.

The Bottom Line On Xilinx's ROCE

This is good to see, and with a sound ROCE, Xilinx could be worth a closer look. Xilinx shapes up well under this analysis, but it is far from the only business delivering excellent numbers . You might also want to check this free collection of companies delivering excellent earnings growth.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.