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Are IDEXX Laboratories, Inc.’s (NASDAQ:IDXX) High Returns Really That Great?

Simply Wall St

Today we'll look at IDEXX Laboratories, Inc. (NASDAQ:IDXX) and reflect on its potential as an investment. Specifically, we're going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. And finally, we'll look at how its current liabilities are impacting 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. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.

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 IDEXX Laboratories:

0.48 = US$533m ÷ (US$1.7b - US$619m) (Based on the trailing twelve months to June 2019.)

Therefore, IDEXX Laboratories has an ROCE of 48%.

See our latest analysis for IDEXX Laboratories

Is IDEXX Laboratories's ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. IDEXX Laboratories's ROCE appears to be substantially greater than the 9.4% average in the Medical Equipment industry. We would consider this a positive, as it suggests it is using capital more effectively than other similar companies. Regardless of the industry comparison, in absolute terms, IDEXX Laboratories's ROCE currently appears to be excellent.

You can see in the image below how IDEXX Laboratories's ROCE compares to its industry. Click to see more on past growth.

NasdaqGS:IDXX Past Revenue and Net Income, October 28th 2019

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. ROCE is, after all, simply a snap shot of a single year. Since the future is so important for investors, you should check out our free report on analyst forecasts for IDEXX Laboratories.

What Are Current Liabilities, And How Do They Affect IDEXX Laboratories's ROCE?

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that 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.

IDEXX Laboratories has total liabilities of US$619m and total assets of US$1.7b. Therefore its current liabilities are equivalent to approximately 36% of its total assets. IDEXX Laboratories has a medium level of current liabilities, boosting its ROCE somewhat.

The Bottom Line On IDEXX Laboratories's ROCE

Despite this, it reports a high ROCE, and may be worth investigating further. IDEXX Laboratories 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.

I will like IDEXX Laboratories better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

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.

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. Thank you for reading.