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IRadimed Corporation (NASDAQ:IRMD) Is Employing Capital Very Effectively

Simply Wall St

Today we'll look at IRadimed Corporation (NASDAQ:IRMD) 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.

Firstly, we'll go over how we calculate ROCE. Second, we'll look at its ROCE compared to similar companies. Last but not least, we'll look at what impact its current liabilities have on 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. 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.

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 IRadimed:

0.14 = US$8.2m ÷ (US$63m - US$5.7m) (Based on the trailing twelve months to September 2019.)

So, IRadimed has an ROCE of 14%.

View our latest analysis for IRadimed

Does IRadimed Have A Good ROCE?

ROCE is commonly used for comparing the performance of similar businesses. IRadimed's ROCE appears to be substantially greater than the 8.9% average in the Medical Equipment industry. We consider this a positive sign, because it suggests it uses capital more efficiently than similar companies. Regardless of where IRadimed sits next to its industry, its ROCE in absolute terms appears satisfactory, and this company could be worth a closer look.

IRadimed's current ROCE of 14% is lower than 3 years ago, when the company reported a 40% ROCE. So investors might consider if it has had issues recently. The image below shows how IRadimed's ROCE compares to its industry, and you can click it to see more detail on its past growth.

NasdaqCM:IRMD Past Revenue and Net Income, January 8th 2020

When considering this metric, keep in mind that it is backwards looking, and 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. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.

IRadimed'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.

IRadimed has total liabilities of US$5.7m and total assets of US$63m. Therefore its current liabilities are equivalent to approximately 9.0% of its total assets. In addition to low current liabilities (making a negligible impact on ROCE), IRadimed earns a sound return on capital employed.

Our Take On IRadimed's ROCE

If IRadimed can continue reinvesting in its business, it could be an attractive prospect. There might be better investments than IRadimed 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.

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

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.