Today we are going to look at Ideanomics, Inc. (NASDAQ:IDEX) 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. Next, we'll compare it to others in its industry. Then we'll determine how its current liabilities are affecting its ROCE.
Return On Capital Employed (ROCE): What is it?
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'.
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 Ideanomics:
0.12 = US$13m ÷ (US$149m - US$35m) (Based on the trailing twelve months to June 2019.)
So, Ideanomics has an ROCE of 12%.
Does Ideanomics Have A Good ROCE?
ROCE is commonly used for comparing the performance of similar businesses. Using our data, we find that Ideanomics's ROCE is meaningfully better than the 9.6% average in the Software 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 Ideanomics compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.
Ideanomics reported an ROCE of 12% -- better than 3 years ago, when the company didn't make a profit. That suggests the business has returned to profitability. You can click on the image below to see (in greater detail) how Ideanomics's past growth compares to other companies.
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. You can check if Ideanomics has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.
Do Ideanomics'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 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 counter this, investors can check if a company has high current liabilities relative to total assets.
Ideanomics has total assets of US$149m and current liabilities of US$35m. Therefore its current liabilities are equivalent to approximately 23% of its total assets. A fairly low level of current liabilities is not influencing the ROCE too much.
The Bottom Line On Ideanomics's ROCE
Overall, Ideanomics has a decent ROCE and could be worthy of further research. There might be better investments than Ideanomics 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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