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Do Kimball Electronics, Inc.’s (NASDAQ:KE) Returns On Capital Employed Make The Cut?

Simply Wall St

Today we are going to look at Kimball Electronics, Inc. (NASDAQ:KE) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First of all, we’ll work out how to calculate ROCE. Then we’ll compare its ROCE to similar companies. Then we’ll determine how its current liabilities are affecting its ROCE.

What is 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. 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 Kimball Electronics:

0.11 = US$41m ÷ (US$701m – US$321m) (Based on the trailing twelve months to December 2018.)

Therefore, Kimball Electronics has an ROCE of 11%.

See our latest analysis for Kimball Electronics

Does Kimball Electronics Have A Good ROCE?

ROCE can be useful when making comparisons, such as between similar companies. Using our data, Kimball Electronics’s ROCE appears to be around the 11% average of the Electronic industry. Separate from Kimball Electronics’s performance relative to its industry, its ROCE in absolute terms looks satisfactory, and it may be worth researching in more depth.

NasdaqGS:KE Past Revenue and Net Income, March 8th 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. You can check if Kimball Electronics has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

How Kimball Electronics’s Current Liabilities Impact 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.

Kimball Electronics has total assets of US$701m and current liabilities of US$321m. Therefore its current liabilities are equivalent to approximately 46% of its total assets. Kimball Electronics has a middling amount of current liabilities, increasing its ROCE somewhat.

What We Can Learn From Kimball Electronics’s ROCE

While its ROCE looks good, it’s worth remembering that the current liabilities are making the business look better. You might be able to find a better buy than Kimball Electronics. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you are like me, then you will not want to miss this free list of growing companies that insiders are 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.