Today we are going to look at Zebra Technologies Corporation (NASDAQ:ZBRA) 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. Then we'll compare its ROCE to similar companies. Last but not least, we'll look at what impact its current liabilities have on its ROCE.
Understanding Return On Capital Employed (ROCE)
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'.
So, How Do We Calculate ROCE?
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 Zebra Technologies:
0.19 = US$682m ÷ (US$4.7b - US$1.2b) (Based on the trailing twelve months to June 2019.)
So, Zebra Technologies has an ROCE of 19%.
Does Zebra Technologies Have A Good ROCE?
One way to assess ROCE is to compare similar companies. Zebra Technologies's ROCE appears to be substantially greater than the 12% average in the Electronic industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Separate from Zebra Technologies'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, Zebra Technologies currently has an ROCE of 19% compared to its ROCE 3 years ago, which was 5.5%. This makes us think the business might be improving. The image below shows how Zebra Technologies's ROCE compares to its industry, and you can click it to see more detail on its past growth.
When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive. Companies in cyclical industries can be difficult to understand using ROCE, as returns typically look high during boom times, and low during 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 Zebra Technologies.
Zebra Technologies's Current Liabilities And Their Impact On 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 ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.
Zebra Technologies has total assets of US$4.7b and current liabilities of US$1.2b. Therefore its current liabilities are equivalent to approximately 26% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
What We Can Learn From Zebra Technologies's ROCE
With that in mind, Zebra Technologies's ROCE appears pretty good. There might be better investments than Zebra Technologies 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.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
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If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.