Are Integer Holdings Corporation’s Returns On Capital Worth Investigating?
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Today we'll look at Integer Holdings Corporation (NYSE:ITGR) 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.
Return On Capital Employed (ROCE): What is it?
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. All else being equal, a better business will have a higher ROCE. Ultimately, it is a useful but imperfect metric. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since 'No two businesses are exactly alike.'
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 Integer Holdings:
0.083 = US$183m ÷ (US$2.4b - US$172m) (Based on the trailing twelve months to March 2019.)
Therefore, Integer Holdings has an ROCE of 8.3%.
Check out our latest analysis for Integer Holdings
Is Integer Holdings's ROCE Good?
One way to assess ROCE is to compare similar companies. It appears that Integer Holdings's ROCE is fairly close to the Medical Equipment industry average of 10%. Aside from the industry comparison, Integer Holdings's ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.
In our analysis, Integer Holdings's ROCE appears to be 8.3%, compared to 3 years ago, when its ROCE was 4.5%. This makes us wonder if the company is improving. You can see in the image below how Integer Holdings's ROCE compares to its industry. Click to see more on past growth.
It is important to remember that ROCE shows past performance, and is 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. Since the future is so important for investors, you should check out our free report on analyst forecasts for Integer Holdings.
Do Integer Holdings's Current Liabilities Skew Its ROCE?
Current liabilities are short term bills and invoices that need to be paid in 12 months or less. 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.
Integer Holdings has total liabilities of US$172m and total assets of US$2.4b. Therefore its current liabilities are equivalent to approximately 7.2% of its total assets. Integer Holdings reports few current liabilities, which have a negligible impact on its unremarkable ROCE.
Our Take On Integer Holdings's ROCE
Based on this information, Integer Holdings appears to be a mediocre business. Of course, you might also be able to find a better stock than Integer Holdings. So you may wish to see this free collection of other companies that have grown earnings strongly.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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.
